By Sifiso Takirambudde
This week, Nouriel Roubini outlined four factors that may contribute to a perfect storm converging on the global economy. Between the political deadlock over the budget deficits in the US, the European sovereign debt crisis, stagnation in Japan and a slowdown in China, it’s hard not to be intrigued by this new economic disaster forecast. The one thing that stood out to me is that we have so much more information about the first three scenarios than the last – the Chinese deceleration. There is a budding debate over whether this downturn will lead to either a soft or a hard landing for the second largest economy.
Being a glass-half-empty guy these days, I had to examine what if anything could drive a hard landing for the Chinese economy. The one thing that has stood out to me over the past year is the Real Estate market. Roubini’s choice of words, specifically the term overcapacity, has to draw more scrutiny to the property bubble developing in China.
As expected the levers in play for this scenario are commodities like steel, coal and agricultural commodities. But aside from what may be the symptoms of such a malady, I am much more interested in the cause. For one we have Chinese inflation reaching 5.5%, even though we’ve seen significant efforts to tighten lending by Beijing. Then there are the don’t-bet-on-it variables like access to adequate information and market confidence in the Chinese government’s legislative capabilities.
I will say that one upshot of authoritarian governance is that the Chinese are far better equipped to mobilize on issues. This is true at least in comparison to Western democracies like the US, which are stuck in gridlock on the debt ceiling. But if I’m honest with myself, and knowing that history rhymes, markets are overestimating Chinese capabilities. This reflects the sense of ignorance which is a key ingredient to the formation and rupturing of any bubble. As I mentioned before access to adequate information will play a significant role.
Last, month hedge fund manager Jim Chanos said something that caught my eye –
The executives that [my team] met with were sounding a little bit more uncomfortable about the current situation.
Doesn’t that say it all? Here is a look at what crash in the market might look like, with commodities like Copper feeling most of the brunt, and that means companies like Southern Copper Corp (SCCO), Tenaris (TS) and L.B. Foster (FSTR) are going to feel major pain.