I still don’t believe we’re hearing the full story out of China. Goldman Sachs economists MK Tang and Maggie Wei wrote that errors and omissions were equivalent to net outflows of more than $300 billion since 2010 with a record $63 billion in the third quarter of 2014. This reminds me of the outflow of funds leaving Russia prior to the Russian financial collapse in 1998.
“Such outflows probably have an illicit nature, occurring through opaque channels and falling outside of effective regulatory oversight,’” Tang and Wei wrote. “Illicit flows are probably harder to control and hence could represent a more worrying source of risk to financial stability.”
At this time I’d also like to refer back to Mark Cook and his cumulative tick indicator. He had the following to say – Conditions today remind me of a speech I gave in February 2000 to some traders in New York. I was direct: “You who are in the stock market, get out now — you will get killed.” He further points out that a certain negative set-up has happened only two other times, in March 2000 and December 2007. In each of the following years, the market lost more than 30%.
Although two data points are not enough to draw a conclusion from, Mark has based his findings in relation to historical data points – we just happen to be at an extreme.
So there you have it. The only time the U.S. market has been valued higher than it is today on the metrics above is the outlier, the 1998-1999 dot.com bubble.
The naïve investor is in the best position to take advantage of current market conditions as they have no fear and therefore won’t miss out if dot.com type of market melt-up occurs again. The intelligent investor has no choice but to understand that current valuations preclude extreme caution over the next couple years on a risk/reward basis.