In the architecture of their life some may display Potemkin happiness in view of hiding the dark features…preferring to set up a window dressing of fake satisfaction rather than being rejected.
– Erik Pevernagie
Though the month and quarter ended on a Tuesday Barrons was clearly of a mind to start the celebration early. “The statistics are relentlessly upbeat…the benchmark index (the S&P 500) is on pace for its best September since 2013. And that’s before what is historically the strongest quarter of the year.” The Information Technology sector won the prize for the highest returns for the month, quarter and year to date with gains of 7.25%, 13.2% and 22.3% respectively besting the S&P 500’s 3.65%, 8.1% and 14.8%. Gold though continued to outshine the equity markets profiting investors in “the barbarous relic” 11.8% for the month, 16.6% quarter and 46.8% year to date.
Many observers both geopolitical and financial believe in the inevitability of China’s global supremacy. On Amazon’s website prospective readers are encouraged to purchase the recently published China’s Supremacy: The End of American Global Dominance by Lionel Osamba with the book described as providing the reader “a deep dive into the intricacies of China’s ascent offering…an unparalleled view into the factors driving this seismic shift.” Certainly, the rise of globalization since the 1990’s has witnessed the greatest increase of a nation’s wealth in history. A more nuanced understanding of globalization though reveals why it is ending and with it the rate of growth of China’s economy, a story much of which has been built upon falsehoods and deception.
In a globalized economy nation’s trade surpluses must equal other nation’s trade deficits. The structure of the two nation’s economies reflects this with China’s 42% share of investment in its economy contrasting with the U.S.’s 22% and household consumptions 69% share for the U.S. and 39% for China with the U.S. shares close to the global averages. China uses investment to achieve its targeted economic growth rate but much of that investment creates negative returns resulting in Chinese debt rising by 100% since 2016 reaching a level of 291.9% in 2024 versus the U.S.’s 249.4%. These numbers though do not reveal the actual severity of China’s challenges as, unlike the U.S., it does not recognize bad debt, resulting in a significant overstatement of the actual size of its economy and the near certainty that it is significantly overstating what that rate of growth has been and is.
China’s glittering infrastructure is the envy of the world but, in fact, China is a poor country, 35% of whose population is estimated to have never experienced the pleasures of indoor plumbing and with a GDP 64% of that of the U.S. with a population four times larger. China’s population aged 15 to 60 peaked at 929 million in 2012 and it is estimated will be 820 million in 2035 with males in the 15 to 19 age cohort outnumbering females 115 to 100. 60% of Chinese household assets are invested in real estate, twice that of the U.S., with home (almost exclusively apartments) prices 50 times the average family income versus 4 times in the U.S. Home prices have fallen 20% to 30% since August 2021 and it is estimated fifty million apartments are unoccupied. Personal income tax receipts are unchanged since 2018. The U.S. is not without its challenges but ours is a flexible system capable of transitioning to a changing world. China is a totalitarian state that is obscuring visible signs of failure. As those signs become increasingly visible will it break?
50%/50% portfolio investors matched their prior month returns with a return of 3% for the month, 6 ¼% for the quarter and now 17% for the year. Equities returned 3 ½% for the month and 8% for the quarter with fixed income 1½% and 2.8%, gold 16 ¾% and 40% and variable rate securities 3% and 13 ½% respectively.
Mark H. Tekamp