This alarming and lengthy article is from a newsletter called Tedbits, sent out by a financial services professional with a dedicated readership, mostly contrarians who don’t buy much of what they read in the mass media or see on CNBC. He outlines just how scary the current Shenzhen/Shanghai stock market bubble is and how it could well generate painful reverberations that will affect all of our lives, whether we’re in China or the US. If you were worried about the state of the US dollar before, just wait until you read this. Sorry for the fearfully long quote, but it’s good.
The Chinese public is in a full blown mania, enormous amounts of their money in at the top, at unbelievably stretched valuations and a rickety banking system with the authorities trying to reign in the mania. Make no mistake in viewing this: this is the recipe that caused the great depression in the United States. A condition the Chinese government will wish to avoid at all costs, just as Bernanke and the US treasury must now avoid a collapse in US asset markets at any cost.
It is now “inflate or die”, and the club has just admitted a new member, and it resides in a place called “BEIJING, CHINA”. The Chinese government’s ability to manage markets and capitalism is going to get a severe test RIGHT NOW, and based on today’s report in the FT they are totally unprepared to understand the enormity of the unintended consequences that can occur if the choose the wrong path to dealing with this. US dollar based Fiat money and credit creation is now moving into the arteries of the Chinese economy and has trickled down to the citizens. What do you think might unfold if the emerging Chinese consumer and the US consumer are knocked out at the same time? It is not a pretty thought. If this happens the Chinese consumer will never emerge as everyone in Beijing and the world hopes for. The great depression of the US repeated in China, exacerbated by an antique banking system that is unable to properly transmit and provide liquidity. You can expect them to handle it the same way Greenspan did, the Hu Jintao put is about to be born. Moral hazards pasted one on top of another….
POP, Goes the Bubble?
This week Steven Roach wrote a missive about Trade Relations with China, that politically they are past the “point of no return” outlining dangerous protectionist plans, rhetoric and actions coming out of Washington DC. And that this rhetoric no longer was limited to China, as Japan has emerged as an additional poster child of irresponsible Trade and currency behavior. America’s two biggest creditors are having spitballs lobbed directly in their eyes (try spitting in your bankers face sometime, see where it gets you), US politicians behaving locally in a global world. It appears that if the Chinese don’t prick the bubble themselves the US congress will! It is a disaster, and a pop that will be heard around the world. It threatens to make the problem in China’s stock markets much more unmanageable as if fundamental expectations for future business are punctured by these “Public Servants”, the mis-pricing that the big money is currently resting at, in the US and in China will become even wider to the fair value of the holdings. Since business prospects will be severely diminished.
Do you realize what could materialize if these idiots light a fuse while the broad Chinese public is out on the limb of the previous Tedbit? It will be like sawing it off, do you think the Chinese government will see this as anything but an act of brutal aggression? The US consumer will be also be hit hard as the price they pay for everything Chinese will skyrocket.
Nothing fails to amaze me more than the economic ignorance that is Washington DC, they are oblivious to history, fundamentally sound accounting and fiscal policies, and fiduciary responsible behavior. They encourage the American people to spend beyond their means, save nothing and punish personal initiative and wealth creation with high taxes and mind bending micro management through overregulation. Then they pick a fight with the someone’s (China, Russia, Japan, etc.), that can in a heartbeat pull the rug out from underneath the economy and their spending plans. Daring them to do so, a giant game of chicken with our financial livelihoods and futures as the wager they are placing. Our asset based economy where systemic deflationary problems await any appreciable pullback in asset prices, as billions of dollars of loans inch towards diminished expectations. Asset prices that are dependant on 3 billion dollars a day being imported from abroad and foreign lenders. I hope Washington has recently added a number of new printing presses for all the money they will be forced to print as they are forced to become the lender of last resort.
Time to buy gold. Time to short the dollar, and the Shanghai stock market. Irrational exuberance hasn’t ben this excessive since 1999.
This is only a tiny snippet from an immense article. I suggest you read it all.
Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.