China is Only the Symptom

Feb.27.07 | About: iShares China (FXI)

Traders in China are nervous. In a single session, 900 of 1400 stocks traded limit down on the Shanghai Exchange. The composite index dropped -8.9%, eliminating about $100 billion in the space of a few hours. Was something like this unexpected?

I wrote up in January where my associate in Shanghai – the one I call the Fly – urged caution. Despite a market index that has rocketed almost straight up since 3Q05, he went to half cash.

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My monitor shows pre-open bids and offers of the U.S.-traded Chinese stocks that are significantly lower than yesterday’s close. Be prepared for a sizable sell-off today.

I could go on today about China, and the Cara 100 companies in China (CNOOC (NYSE:CEO), NetEase.com (NASDAQ:NTES), China Mobile (NYSE:CHL) and China Telecom (NYSE:CHA)), but the issue is not China. The economy of China will continue to grow strongly at a rate of probably not less than +9 pct per year this year and next, and possibly for several years to come. So CEO, NTES, CHL and CHA will recover from the hammering they will take today and in the days and weeks to come.

No, the real problem is not China, or for that matter India, Russia or Brazil.
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In a sense, I hope that China does not become a cover for a bigger story today, which is the unraveling of the U.S. stock market. Economic data in the U.S., nor the corporate fundamentals of U.S. companies, are nowhere near as strong today as Talking Heads would have the public believe. That is the problem.

Today’s econ data is extremely weak. Yesterday, Alan Greenspan told an important audience in Hong Kong that a U.S. recession may be in the cards. If you happened to be an owner/manager of a Chinese company that relies on American purchases for your bread and butter or dim sum for that matter, then I am sure Greenspan’s remarks did not pass through from one ear to the other without the alarm bells registering.

Yesterday Bear Stearns downgraded the US Railways and Truckers. Why? Well, they reported that the unused capacity of the truckers, for example, is at long-term high levels.

UPS (NYSE:UPS), I have been telling readers, has not been lagging for nothing. US Durable Goods Orders have plummeted (-7.8 pct). Refrigerators, automobiles, industrial machinery, electrical machinery, computers, and the like are not being ordered. They are not being manufactured, and they are not being shipped – in quantities you have been led to believe. The evidence is now coming through.

America is in economic trouble. The economist Nuriel Roubini has been sounding the warning bell, but the TV programs that are homes to the familiar Talking Heads have arrogantly dismissed him, and persons like him.

So the problem is not just China. The events in China today are just a symptom of problems in America. I suspect that when this story is complete, traders will think the 2000-2002 Bear was a mild one. But the Gnomes are bulldogs, and they have put their terriers into the U.S. Fed and Treasury. I believe there will be one final attempt to print the way out of a market crash. Ergo; I see one final push in precious metal prices.

But the end of the long-term global stock cycle is near. It has been driven by a credit balloon that cannot be pumped higher. The peak of the cycle would have occurred in May 2006 except for the programs of the U.S. Administration (including the Fed) to ramp up the money printing.

The sad thing is that at the end of the day, when inflated stock prices blow up, those holding debt will still be holding the same level of debt. The banks will be demanding payment. That's what bankers do -- real bankers, not trader-bankers.

Yes, there is a storm raging in China, but it has its genesis in the West.