On the heels of a continued collapse in China's stock markets, today one of the greats in the business sent King World News a fantastic piece warning that China's stock market crash has rattled confidence across the globe, even leading to a trading halt on the New York Stock Exchange, plus a remarkable bonus Q&A that includes gold.
July 8 (King World News) – I'd like to start by discussing China, which was routed again last night, as its various indices lost between 5% and 9% (many of which have dropped 30% to 40% in the last couple of weeks). Despite the moves to cut rates, stop short selling, and curtail selling by state-oriented institutions, stocks there continue to be hammered. (Imagine how panicked American investors would be if the Fed made those sorts of changes and they were ineffective.)….
China Just Experienced A Stock Market Crash
Apparently, after last night's action, nearly 27% of the total listed companies in China, which is about $1.4 trillion of equity, have seen their trading suspended or are "limit down" and thus are also unable to trade. In effect, China has just experienced a stock market crash, perversely, after having tried to do what the Fed, Bank of Japan, ECB, and Bank of England have done — i.e., goose their stock market to try and boost their economy — and it appears to have blown up in their face.
People Should Be Frightened That The U.S. Stock Market Will Also Crash
It is remarkable that more people aren't frightened that the exact same thing could happen here in America, because it obviously can. I'm also surprised that China's decline hasn't been called a crash, but I guess that's because there hasn't been a big enough move on any given day. Nonetheless, to see stocks lose that much ground so quickly, despite the commands of the Chinese central bank, ought to be worrying to speculators everywhere. China is a great example of what markets can do and what our stock market most likely will do as well.
Turning to Europe, stock markets there appeared to be pretty unconcerned about the developments in Greece. While most stocks were weaker, it seemed like it was more in sympathy with U.S. trading, as European bond markets rallied, with the exception of Greece itself. I really don't see any way to resolve the Greek stalemate.
As I wrote yesterday, the EU and ECB can't give in much and Greece is in so much trouble it seems like a Greek exit from the euro is about the only way this can end, though I guess we will see how big of an imagination the powers that be in Europe actually have. Can they really provide enough debt forgiveness to make the Greeks happy without creating a huge problem for themselves with other countries?
What's Happening With Gold?
Some folks suggested that gold was sold on the back of Chinese margin calls. I certainly don't know, and anything is possible, but given the time of day that the large break occurred (early morning New York time, midday London time), that idea doesn't make sense to me. What's more, knowing who sold or why almost never tells you where you are in a market cycle in any case.
Gold Is Going To Explode To The Upside
Even given all the problems in Europe, China, and here, it would seem that confidence in central bankers remains high, as there is still no bid for gold. Said differently, we will know when psychology has started to change because gold will erupt. I don't think that moment can be very far away, as the central bank bull case — i.e., the success of the Fed in America — is unraveling just as its cousin is imploding in China.
Remember, we are talking about crowd psychology, so there is no telling in advance when it is going to turn. If I had said three weeks ago that the Chinese market was on the verge of a 30%-plus collapse, people would have said it was impossible. But when dealing with massive misallocations of capital, especially ones that have gone on for a long time, they always seem to continue far longer than seems possible, then evaporate for little or no reason — after having shrugged off plenty of bad news along the way.
Included below are two questions and answers from today's Q&A with Bill Fleckenstein. The questions are from his subscribers and they get to read Fleckenstein's answers every day.
Bonus Q&A
Question: I can't tell you how many smart traders I know, both gold bulls & bears, that say, "Gold needs a big capitulation low down to around $1000, and THEN I'll buy it." It might work out that way, but in my limited experience, when "everyone" is expecting a certain outcome, they rarely get it.
I'm happy to see that Fred Hickey jumped on board my belief that the gold bear ended last Nov, even if the gold bull hasn't really kicked in yet. I know Nov wasn't a large volume capitulation, but after 3.5 YEARS of misery, I'm not convinced there's a lot of bulls left to throw in the towel. Fred & I could be completely wrong and I'm not doing much until the bull is confirmed, but I think the lows are in. Oh yeah, you might have said that, too.
I'm happy to see that Fred Hickey jumped on board my belief that the gold bear ended last Nov, even if the gold bull hasn't really kicked in yet. I know Nov wasn't a large volume capitulation, but after 3.5 YEARS of misery, I'm not convinced there's a lot of bulls left to throw in the towel. Fred & I could be completely wrong and I'm not doing much until the bull is confirmed, but I think the lows are in. Oh yeah, you might have said that, too.
Answer from Fleck: "I would say that a $1,000-ish price is now the consensus as to what will happen. Both by the bears and the former bulls as you note. I don't see why it will happen, given how events are playing out."
Question: Hi Bill. This is getting very emotional regarding gold. I too like all subscribers here are looking for this to end. Do you have any words of encouragement? How much lower can we go or is this it? I'm not losing faith in something I believe in.
Answer from Fleck: "The action is about psychology and emotion. There is no way to say when it will end, but we can know that the storyline that has been driving all financial markets higher, i.e., that the Fed, BoJ, ECB all have things well under control, is unraveling. Hence, we are closer to where psychology will change. It is just not possible to say when the exact moment will be reached. When it changes, it will be big and fast, just like the China/Greek dislocations moved rapidly. Hope that helps. IMO, we are so close, generically."
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