Dow up 125 points yesterday, to a new all-time record.

Why? What’s behind it? The economy is not so hot. Why the red-hot stock market?

China is back in the news. A new report from CBS’s “60 Minutes” documents the extent of the ghost cities in China — miles and miles of empty highway, office towers, apartments and malls. Analysts are talking about the biggest real estate bubble in history!

Is China a bubble? We don’t know.

Does it matter? Well… yes… maybe. If China melts down or blows up the demand for oil and other resources goes down. The Chinese have pumped vast sums of money into development projects. That money helped to keep people on the job… and also kept the ships full of stuff, going back and forth across the world’s oceans.

Trouble in China is trouble everywhere — particularly in Australia (which has been selling itself by the ton to the Chinese) and in Europe (which sells its precious, high-touch products by the boatload). Drive around Beijing and you see German autos, Italian shoes, Swiss watches and French perfumes.

But why worry? The Chinese can print money too! When China does something, it tends to do it to excess. That’s why there are so many empty buildings in the Middle Kingdom and why it might have created the biggest real estate bubble in history.

China overdoes it when it comes to central bank stimulus measures too. Arguably, no central bank has done more than the People’s Bank of China when it comes to pumping up the economy.

M2 money supply in China is roughly twice GDP. In developed economies the ratio between M2 and GDP is usually below one. In emerging market countries, M2 is usually 1 to 1.5 times GPD.

That’s why bad news for China… like bad news for the U.S. economy… could be good news for the stocks. The Chinese feds will pump more money. Stocks will go up!

The New York Times reports:

The Dow Jones industrial average, which measures the performance of 30 blue-chip companies, closed with a gain of more than 125 points Tuesday, surpassing its previous record close of 14,164.53, which it achieved nearly five and a half years ago, as well as its record intraday high, set around the same time, of 14,198.10.

Of course, a few things have happened since October 2007. The housing market collapsed, the financial system went into meltdown, the European Union started to fray and politicians dragged the United States through an on-off-on-again fiscal imbroglio.

But stocks managed to move beyond all that.

Since a low point in March 2009, the Dow Jones index has more than doubled, stunning even the most seasoned stock market watchers. It closed at 14,253.77 Tuesday.

“What’s amazing about this bull market is that people still don’t think it’s real,” said Richard Bernstein, chief executive of Richard Bernstein Advisors, a money management firm. “We think this could be the biggest bull market of our careers.”

The Aristotelian Error

Yeah — you can count us among those who don’t think it’s real. We think it’s what happens when all the world’s central banks are evaporating yields on bonds and corralling investors into stocks.

If China goes into a serious correction, how will its leaders overreact? With even more funny money and EZ credit?

We don’t know enough about the Chinese situation to make an educated guess. So we’ll make an uneducated one. Whether they live in Beijing or Washington, economists tend to have the same dumb ideas.

They are heirs to the Aristotelian error: the belief that without them the whole world will fall to pieces. They believe they must set the price of the economy’s most essential ingredient: credit. And if the economy fails to do their bidding, they will give it more money too.

All major central banks are in agreement about this. All believe they can see, in their mind’s eye today, a picture of the world as it will be tomorrow. And they further believe that they can Photoshop it to make it better.

They improve the future by making credit cheaper or dearer, as the occasion requires.

But how is it possible, you might wonder, that these few homo sapiens can do something so remarkable?

How do they know precisely how much new money to create and how to price it? What kind of bread do they eat? What kind of liquor do they drink? Surely, they do not eat and drink the same things we do; for they must sup at the gods’ table to be able to do such things.

In their naïve and simpleminded way, the planners believe that a slack economy calls for overtime work at the central bank. That which the private sector taketh away, they say, is what we will put back — and more!

So stocks go up. That’s our best explanation.

Regards,

Bill

Bill Bonner started Diary of a Rogue Economist to share his over 30 years of economics and market experience with as many interested readers as possible.

Diary of a Rogue Economist is always free, and it’s delivered to your email each business day.

Canadian home prices mirrored those in the U.S. as they surged from 2001 to 2008, then plunged during the global financial crisis.  Since 2009, however, they have once again been on a tear as U.S. home price have remained subdued.

What follows is a review of how the Canadian housing market has evolved since 2001.  It should be noted that Carney took over the Bank of Canada in 2007.

……read it all HERE

also see: 

The top 15 US cities are ranked by the projected annualized change in home prices between Q3 2012 and Q3 2017 – HERE

&

The World’s #1 Housing Market Is Ridiculous Again – HERE

….then it may not be too early to sell Chinese stocks.

• Jack Crooks
• Black Swan Capital
• www.blackswantrading.com
• info@blackswantrading.com
• Ph: 772-349-6883

 “The market  is very schizophrenic. However it is possible to follow only a mild (Stock Market -Ed) correction in February, after which the growth to continue.”

“In this situation sell. Restrict positions because euphoria gaining strength.”

“Corporate profits are likely to disappoint this year. Incidentally, there may be geopolitical problems” said Faber, adding that recently returned from a trip to the Middle East, which is the “melting pot.”

Oil demand will be strong

Faber – 2013 Gold Price Prediction

(Faber has 25% of his assets in Gold- Ed)

Marc Faber in a recent interview discussing his predictions and outlook for 2013 regarding gold and silver prices. I have some concerns about confiscation especially in the united states Faber said ” I have argued for the last 12 years that investors should buy a little bit of physical gold every month and put it aside without concerns about corrections. If you don’t own any gold, I would start buying some right away, keeping in mind that it could go down. For the last 40 years in my business I’ve seen people always lose money when they put too much money into something and then it goes down. They panic and sell, or they have a margin call to sell—and lose money. I own gold. It’s my biggest position in my life. The possibility of the gold price going down doesn’t disturb me. Every bull market has corrections.” Marc Faber said in another interview regarding owning Gold

The Buying Power, and Selling Pressure, indicators continue to suggest no major “top” is in the works. Ditto the Advance/Decline line traded to a new high before the mid-week pullback, also confirming the upside. The major averages continue to reside above their respect 50-DMAs and 200-DMAs; and, those moving averages are rising, another bullish sign.

Then there is Berkshire Hathaway (BRK.A/$152,009/Not Covered), which is somewhat of a proxy for the stock market, as it traded to a new all-time last Friday. That said, last Wednesday proved to be a 90% Downside Day suggestive of at least a pause, or perhaps a pullback. Still, with Friday’s rally the “buying stampede” remains in force and today is session 38. Friday’s Fling, however, felt more like a recoil rally rather than the beginning of a new rally leg, at least to me.

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