Hugh Hendry of Eclectica Asset Management and Gary Shilling of A Gary Shilling Company are bearish on China, and the world. We must pay respect to both of these market players as they have had an abundance of correct market calls in the past. Their opinions are contrarian, so for trends to change, major cycles must be ready to roll over. Lets review a few...

First, how can market cycles roll over in a world undergoing massive quantitative easing (QE1 and QE2)? Is it possible that the US Federal Reserve as tamed the market so that there is no more pullbacks, swings or cycles. The US has experienced 'the before/during' quantitative easing (QE = money printing), and has yet undergo the 'after'. A quick review of the 'before' and 'after' effects on the N225 from quantitative easing during Japanese great deflationary bust shows that the 'after' can be very unpleasant.

N225 Chart

We can see the N225 rallied hard during each of the Japanese quantitative easing (QE) periods. However when QE ended so did the rallies. The American QE programs have been back to back (2009 and 2010), unlike the Japanese experience. One can only imagine what will happen to the worlds financial markets when the American QE ends, if it is anything like the Japanese experience then I fear that the cycles rolling over will be very severe. Copper, Australian and Canadian dollar have all enjoyed strong bullish cycles. They will be our subjects.

The Australian Dollar and Copper are two securities that are aligned to China success story. Copper has been used heavily within Chinese construction industry, and Australia has supplied much of it to them, along with steel, coal, etc. Any hick up with China's story and these two securities will roll over hard. China cannot sustain 10% GDP growth without exports to both Europe and USA. Yet the America and Europe economies have lived off QE to support their GDP growth. What if the QE stops or paused for a few years, what then. If growth cant be maintained without QE, what will happen to the Australian, Canadian dollar and copper cycles, that is easy they will roll over hard !

We all now that the rise and fall of the US dollar as much to do with the cycles below, markets are very correlated. Comments on the US dollar can be found here: US Dollar currency, short term bullish, long term bearish not so sure

NOTE: The cycles found the charts that follow were found with RTT Cycle Finder Spectrum.

Australian Dollar (AUDUSD)

Copper in US Dollars

Canadian Dollar

For the world to avoid these cycles rolling over during 2011/12 quantitative easing would need to be continuous. Its too early to say how or when stimulus Keynesian polices will end, I fear that they never will. As the politicians and central bankers have enjoyed this economic power, and power does corrupt.