THERE'S TROUBLE BREWING IN SHANGHAI AND AS WELL AS IN THE REST OF THE WORLD’S EMERGING STOCK MARKETS.
It was November 2010 when I first warned you not to get too excited about China: That China too, must and will succumb to the Natural Laws of Economics of all centrally planned countries and thus the Shanghai Stock Exchange Composite Index was due for a sharp selloff and would lead the rest of the markets down. More recently, the index
had just broken a downward sloping flag formation or consolidating-triangle pattern if you prefer. That was a bearish development, and I figured the Shanghai Index could be
headed as low as 1,800 to 2,000 this year. The Shanghai Index hit 2,200 last December. It has been rallying since then and today, it’s 6% higher than where it
started the year. But it’s unlikely to hold on to those gains.
While the index may continue to bounce in the short term and test the former support line of the pattern giving an excellent opportunity to short with a close stop; it projects a downside price target of about 1800 for the index. That’s a 17% drop from current levels – just above the financial panic low of 1,800 back in 2008. If you are bearish on
China, you should use any rallies back up toward 2,400-2,500 to establish short positions. Buying shares of YXI is one way to establish a short China trade. YXI is an
ETF designed to move in the opposite direction of China’s stock market.
THERE IS NO SUCH THING AS A FREE LUNCH
Fed Chairman Ben Bernanke has taken a lot of heat for printing too much money, having been dubbed "Helicopter Ben." Last week’s post-FOMC announcement and
press conference contained no surprises. The Fed promised to do a small amount of additional harm in the short-term by continuing the distortion of the relative prices of
1 long and short-dated government debt. It will do this via a 6-month extension to the program known as "Operation Twist"; just its name should cause you great concern.
He also promised to eventually do a lot of additional harm via more aggressive price- distorting policies if the economy is unable to recover from the harm that has already
been done to it in the past. The genius leaders of the Fed actually believe that they can help the economy by counterfeiting more, going deeper into debt, driving down the price
of gold and silver and taking other measures that corrupt the price signals upon which the Free Market Economy relies, like interfering with the price of money (interest rates).
But if Bernanke's making it rain money from a helicopter, China's been bombarding its economy from multiple stealth bombers. Money supply rose markedly in May and the recent years' credit growth has surpassed even that of the U.S. in the period leading to
the Lehman collapse. Unfortunately, instead of being put to good use, much of that money has ended up in the pockets of Government officials and in the hands of
wasteful, state-owned enterprises (SOEs). Meanwhile, just as here in the US, cash- starved private entrepreneurs have been relegated to the sidelines, unable to get even
a small share of either Washington or Beijing's ever increasing, politically driven, capital- misallocations. Is this another sign of the coming unsustainable American and Chinese growth?
IT'S RAINING YUAN
The SOEs get tons of money to splurge on fancy, wasteful items, get wined and dined by the country's most powerful and politically connected, yet contribute relatively little to the economy. In many cases, they're profitable solely because they're the only players
allowed in strategically important industries. Meanwhile, the small and medium-sized businesses do the grunt work, contributing two-thirds of all taxes and total industrial output, and employing more than 75% of the Chinese and American workforces. Yet despite the surge in bank credit, many are either denied access altogether or charged absurdly high rates on loans. Of course, China’s four largest state-owned banks have a
tremendous bias in lending to SOEs. And the government's vested interest in protecting the status quo has led to major restrictions on multinational banks looking to expand
within China. So naturally, JPMorgan Chase, Wells Fargo and Bank of America have decided to avoid retail banking in China altogether.
As a result of their intimate connections with China's authorities, SOEs enjoy a number of remarkable advantages that private firms would kill for. They get huge government
subsidies in the form of significantly lower tax rates, have access to much cheaper basic inputs like water, land, and energy, and enjoy barriers to entry by competitors in key industries. But despite their edge, SOEs are much less efficient than their private
counterparts (something that is completely lost on Politico’s of all stripes). In fact, many are loss-makers and there's mounting evidence they've misallocated capital on a
tremendous scale. But thanks to the "wonders" of state capitalism, they keep getting funded, accounting for more than 75% of all bank loans and continue to expand.
Sounds like the big banks here.