Chinese Stimulus “Bazooka” Blasts Stocks Higher as Gold Soars Above 2,600

By Victor Sperandeo with the Curmudgeon

China’s Huge Stimulus Program Rockets Stock Prices:

“The Big Chinese Bazooka” was the title of a blog post by Alfonso Peeccatiello to describe a “bazooka” of stimulus measures China’s policy makers announced recently. The package included:

· More interest rate cuts.

· The Chinese version of the ''Fed put.''

· Vague wording about fiscal stimulus.

Interest rate cuts and the ''backstop'' facility have propelled the Chinese stock market, which was up +21.43% in just 15 days (from 9/12/24-9/27/24)! Here’s a 1-month chart of a CNYA – a popular ETF which tracks China’s stock market as represented by "A-shares" that are accessible through the Shanghai-Hong Kong Stock Connect program or the Shenzhen-Hong Kong Stock Connect program.

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Commodities are Bullish:

As China buys a great deal of commodities, it should be no surprise that mostly all commodity futures markets are in uptrends (except crude oil and natural gas). For example, Copper was up +15% since September 4^th, while Lumber was +11% in the last month, after making a low on July 15^th.

Also, the U.S. dollar has been weaker lately against major foreign currencies which tends to push up the price of imports and gives competing U.S. manufacturers an “umbrella” to raise prices.

--> That’s a telling sign that inflation could come back with a vengeance, which may cause the Fed to pause the interest rate cuts they have planned for later this year and next?

Side Comment: Victor opines that West Texas Crude Oil futures are not rising because China buys most of its energy from Russia at a discount. Also, there is arbitrage and switching from crude oil/gasoline and diesel fuel to natural gas. That’s explained in a YouTube video questioning the end of OPEC.

Stock Market Comments:

It seems unusual that Germany’s DAX stock index made a new all-time high on Friday, while the German economy continues to stagnate. Germany's real GDP declined by 0.2% in 2023 and is forecast to be flat this year. The unemployment rate is expected to increase from 5.7% in 2023 to 6% in 2024.

-->That’s one of many global stock market anomalies we have observed in recent years.

In the U.S., years of elevated stock market valuations is yet another head scratcher as per this chart, courtesy of John Hussman:

Even if one accepts analyst estimates of year-ahead S&P 500 operating earnings at face value, current valuations are at rare extremes. Since the price/earnings ratio on forward operating earnings has only been popular since the 1990’s, investors often overestimate both year ahead earnings and what “normal” valuations (??) actually are.

The above chart shows super extended market valuations since 1998, except for the 2008-2009 great recession/mortgage meltdown.

As we’ve noted in many past Curmudgeon/Sperandeo posts, U.S. corporate earnings have increased mainly due to massive government spending and deficits. More on this in the next subhead below.

For corroboration, Jesse Felder wrote on X: “We believe corporate earnings have been inflated by unsustainable growth in government debt and spending. History has been very clear about profit and market cycles built on debt—they don't last.”

U.S. Budget Deficits and Stock Prices:

The S&P is now at an all-time high largely due to humongous U.S. budget deficits. The deficit was $380 Billion in August, which was $90 billion higher than estimates. The total U.S. federal budget deficit should reach $2 trillion for fiscal 2024. CBO forecasts it will grow to $2.8 trillion by 2034 (assuming no recessions!).

-->Corporate America realizes a great deal of that deficit as increased earnings which pushes up stock prices.

However, that was not always the case as we now explain.

Curmudgeon Comments:

That budget deficits are now positive for stocks is in sharp contrast to the 1980s when outsized budget deficits resulted in higher yields on U.S. Treasuries. That created a fear of corporate bond issuers being “crowded out” and therefore not being able to borrow.

Stock prices made little progress during those years as they were competing with high real yields on fixed income investments, especially U.S. notes and bonds.

Here’s a table showing U.S. budget deficits, debt increase and deficit-to-GDP-ration from 1980-1986:

1980	$74	$81	2.6%
1981	$79	$90	2.5%
1982	$128	$144	3.8%
1983	$208	$235	5.7%
1984	$185	$195	4.6%
1985	$212	$251	4.9%
1986	$221	$302	4.8%

Stock prices went up and down during the early 1980s, but made little overall progress as shown by this table of the S&P 500 prices by year:

Jan 1, 1985	171.60
Jan 1, 1984	166.40
Jan 1, 1983	144.30
Jan 1, 1982	117.30
Jan 1, 1981	133.00

And what about 1987 – the year of the largest one-day U.S. stock market crash in history?

The U.S. budget deficit for the fiscal year 1987 was $149.8 billion, or 3.3% of GDP. Unknown to most readers, the S&P did NOT bottom on October 19, 1987, after the “Black Monday” stock market crash that day, but at a split adjusted close of 223.92 on December 4, 1987.

-->In fact, the S&P 500 lost -13.34% between October 21, 1987, and December 4, 1987!

Victor’s Conclusions:

We have repeatedly stressed that political uncertainty is the reason to be flat stocks and long gold as the asset of choice to own now. In particular, geopolitical risks and potential chaos in the November U.S. elections (and after).

-->Gold hedges both these events and so is the way to stay solvent.

End Quotes:

“Civilization is like a thin layer of ice upon a deep ocean of chaos and darkness.” Werner Herzog.

“Civilization begins with order, grows with liberty and dies with chaos,” Will Durant.

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Be well, stay calm, success and good luck. Till next time………...

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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