1. The false trigger
Many investors are looking for another crises to start out here in Asia. Their reasoning revolves around China: with seemingly "every" Chinese "with all of his/her money" now in the A share market, the reasoning goes that if the Chinese sneeze, the world will catch cold. Besides, the last Asian crises started in Asia, did they not?
I disagree with a crisis emanating from China. First, we are in the run-up to the 17th Party Congress, and there are the Olympics next August. The leadership will disallow any event to rain on its parade - until th Olympics are over with.
Besides, the portion of money that the Chinese have tied up in the stock market is about 6% of their assets. The bulk remains in the form of savings at banks.
2. The real triggers
We have been braying for many months that the Economic Time in America as well as Europe has been worsening steadily. We will update The Economic Clock™ next week. Suffice it to say that America's and Europe's excess demand for money is crimping its past excess demand for goods. Now, both areas are confronted by an excess supply of goods.
This excess supply of goods was made evident to us during dinner celebrating our first decade under Chinese rule. One lady is the world's leader in retail shoes, and the other is very strong in the toy industries. Both are in industries that people need - people don't have the luxury of going barefoot, and parents don't have the luxury of not buying toys for their kids. And both ladies are super-smart.
Both ladies said that "nobody" is buying. So, perhaps the overpaid stockbrokers and investment bankers etc. are still frolicking in their millions, the the man on the street is not.
What will trigger a crisis, then, is that the market finally accepts that America's and Europe's Economic Time is terrible and worsening. That, in turn, means that the profits outlook worsens markedly, and out pile the investors.
And that trigger, that moving out of denial about The Economic Time getting worse, will be "pulled" by two other forces: increasing noise about sub-prime mortgage problems, especially in 1H08, when loans get rolled-over, and an unwinding of the yen carry trade, resulting in a sharply stronger yen.
How To Make Money Off This Idea
1. Exit the stock market
2. Buy an emerging bond "put" option - bonds will tumble violently, albeit shortly
3. Buy a US Treasury bond "call" option - there will be a flight to quality, so up go US Treasuries
4. Once the dust settles, buy back cheap China H-shares and Korean stocks