The World Is A Big Place

Includes: DIA, IWM, QQQ, SPY
by: Scout Finance


German exports to China are declining.

The Japanese and German stock markets are retreating.

Buybacks are inflating earnings growth.

My original reason for getting bearish on the global economy at the end of last year was the slowing growth in the Chinese economy. This has been evidenced in the collapse of the Brazilian economy and the collapse in commodities used to build up the Chinese infrastructure. The Brazilian economy is so bad they can't even sell tickets to the Olympics as the government is thinking of giving them away to public school children. The Chinese GDP data is showing about 6% growth for 2016, but this metric is meaningless because of government manipulation of the data.

The chart below is evidence of the shrinking Chinese economy. Total German exports to China have peaked in 2014. Every category shown below is negative besides medical pharmaceutical products. The most important export, which is road vehicles is down 29% from 2014 to 2015. The Chinese economy has shown no signs of turning around as it attempts to move from a manufacturing economy to a consumer-driven economy. It seems as the conventional wisdom is it will be a success. It seems everyone is bullish on China long term.

I don't see why investors should have optimism about China as its one child policy implemented in the mid-to-late 1900s has caused the country to face disastrous demographics much like Japan. The Chinese population is set to start decreasing in 2035 and India is set to pass it in terms of overall population in 2025.

It's easy to obsess about the three major indices i.e. the Dow Jones, the S&P 500, and the NASDAQ because they are promoted by the media, but it is important to take a more global view to understand the health of the American economy and stock market. As you can see below, the German DAX is down 7% for the year and the Japanese Nikkei 225 is down 16% for the year. These two stock markets have come off their recent highs while the S&P 500 is still at its recent highs and is nearing its all-time highs. I think the American indices will follow the global markets lower as the economy slows with China acting as a catalyst for this slowdown.

Click to enlarge

Click to enlarge

Part of the increase in stock values has come from share buybacks. More importantly, share buybacks represent the mindset of corporate management. When CEOs deciding to buy back stock instead of invest in the business they are showing us that they can't find new places to invest because economic growth is at a standstill. As you can see below, buybacks have risen rapidly over the past few years.

The argument that the economy is strong holds little water. The Fed is afraid to raise rates, China is slowing, corporate profits are slowing, and commodity prices are in the basement. Even though the stock market has had a great 6 weeks, when you step back, the market has done nothing in 17 months signifying the market does see this grim economic picture. Things will only get worse when the labor market begins to roll over, as the economy cannot sustain sub-300,000 jobless claims for much longer.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.