Here’s What China’s Stock Market Crash Means for the U.S.

Chinese Stock MarketChina’s Stock Market Crash Suggesting U.S. Economic Collapse in 2016?

The Chinese stock market crashed today and the global markets followed suit. It’s déjà vu! The right questions to ask now are the following two: 1) how will it impact the U.S.? And 2) is it significant enough to trigger a U.S. economic collapse in 2016?

After a short respite, following the summer mayhem, another China market crash is upon us. The seven-percent decline triggered the “circuit breaker” put in place by the Chinese market regulators after the summer crash of 2015, which halted all trading activity on the stock market of the world’s second-biggest economy. Trading may have been stopped on the Chinese market, but stock exchanges in Europe, Asia, and North America are still facing a sell-off.

Now, the Chinese news media outlets are citing the lackluster manufacturing data to be the cause of the selling frenzy, but the reality goes far beyond that.

Simply put, two things primarily became the catalysts for the Chinese stock market crash. First off, the People’s Bank of China cut rates to the point where it induced massive borrowing. Secondly, the borrowers who had limited investment opportunities turned to the stock market, thus inflating it into a full-blown bubble.

In effect, China was able to convert its debt to equity, but the result was devastating for the economy. The sell-off that followed wiped out billions from the market, leaving investors with little to no money to pay off their outstanding debts. (Source: “Everything you’ve heard about China’s stock market crash is wrong,” Quartz, August 27, 2015.)

Now, analyze the local U.S. economy and you might reach the conclusion that something similar is underway. The parallels are uncanny. The U.S. debt is growing, while corporations have been borrowing at record-low rates to fund meaningless acquisitions and share buybacks, in turn, artificially propping up stock prices.

The bull market has brought in droves of naïve investors who hope to make easy money, when in fact, the market is highly overpriced. The current price-to-earnings  (PE) ratio for the S&P 500 is over 21. The last time it hit that number was back in early 2008, following the biggest U.S. economic collapse. Could it be that history repeats itself?

The growing geopolitical tensions in the Middle East are further adding to the fuel. While the government may have finally raised rates by a nominal amount, many believe the Federal Reserve will not be able to continue hiking rates going into 2016 and might eventually go back to cutting them. In the past, the Fed has repeatedly cited international economic and political headwinds as one of the reasons to hold off on raising rates, despite an improving domestic economy.

While it is not all doom and gloom for U.S. investors yet, the Chinese market crash still has strong bearings on the market. Both the Dow Jones Industrial Average and the S&P 500 indices are down a good two percent or more this morning. The international headwinds, coupled with the global stock market volatility, have also sparked investor interest in safer havens like gold bullion, which is also seeing a surge in price today.

As a prudent investor, one must look out for warnings of a U.S. stock market crash in January 2016, as global economics once again begin to reshape local economics.