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Bubble Or Not?

January 18th, 2016

Many people are wondering whether the toppling of China’s market is a sign of another bubble slowly readying to pop. Many analysts when referring to the Chinese economy will admit that China created their own problems with overbuilding and other internal matters; very few will admit to anything other than a soft landing for the worlds second largest economy. to suggest this would be to suggest that the global economy is riding the same bubble not too far behind. No matter who claims what concerning the state of the economy in China, what matters is the truth. And the truth is scary sometimes.

 

The problems that China has created for itself as well as problems from outside of the nations borders, cumulatively effected the drastic slide of their economy in the first few days of 2016. However to understand its broader effect we must look at some of the more narrow causes. One of the largest internal causes of this backslide starts at the top. China’s leadership in recent years has taken the nation away from an economically liberal point of view and driven them towards a conservative nationalistic type of economy.

 

This practice of economy has not proven very successful for other countries outside of China. Turkey, who uses this same kind of national economy, may not have experienced loss as China did, but they did however experience very slow gains as an economy. Turkeys GDP has only seen a 0.8% increase from 2005 to 2015.  What this tells us is that even if China’s economy was to spring back, its not going to be making any gains significant enough to make up for its losses, even on the first day of trading alone, anytime soon. as far as whether we are in an economic bubble or not, this is without a doubt a sign that the bubble is not only real but its already popping.

In fact the problem with the soft landing theory in general is that its trying to predict the future. If there is one thing that humans do not do well it’s predict the future. Harry S. Dent Jr., senior editor of Economy and Markets, has created a set of 10 principles regarding bubbles that not only economists, but individuals as well should be well aware of. Rules 2, 3, and 4 are probably the most pertinent to the question at hand. Rule number 2 states that all growth is cyclical not incremental. Which basically means that there is a circular movement to growth where there will be positive and negative points in the loop; however they will always repeat, the good and the bad.  Rule number 3 is even more ominous than the previous. Rule number 3 states that bubbles will always burst, no exceptions. And rule number 4 states that the greater the bubble is, the greater the burst is going to be. If we can look at rules 3 and 4 in regards to China’s Market, it’s easy to see the bubble that is being argued about. China fell just as far as it rose if not harder during its first two days 2016, showing that not only was there a sudden pop in the bubble, but that there was a fall similar to the size of the rise which China had been experiencing during the last decade.  China doesn’t look like it’s headed anywhere near a soft landing.

Overall what can be taken from this is that the bubble is real, and not only is it real but its popping.  Don’t let the soft phrasing of analysts sway you  away from the facts, into a false sense of security. But what can you do to protect yourself and your money? well you can create security for yourself  and your loved ones by making smart financial decisions in this shaky time of the global economy. Contact David Ortiz your registered investment advisor representative today and make sure your money is where it needs to be.