Death Watch China Update

On Saturday China raises the banking reserve requirements again in an attempt to cool their economy. As discussed some time ago, I believe the Chinese economy is out of control, is melting up and officials know it. Still no sell signal on the Shanghai Index but it smells very ripe for one.

Recently, a well known market guru has come out and made comment that the Chinese stock market is not a bubble but if it goes up another 30%, it will be a bubble. Huh? So, a bubble is defined by a 30% differential in equity prices? This is complete and utter nonsense. But, at the same time he has stated that the Federal Reserve is printing money with abandon. Another bit of nonsense. It is obvious he has ulterior motives or serious bias in his statements. We've been talking about the Chinese economy being a bubble long before Chinese equities became a bubble and long before the possibility was acknowledged by anyone on Wall Street. Equities don't determine if an economy is a bubble. Equity blow offs are a manifestation of an economic bubble and that is how we knew China's economy was a bubble and wrote last summer that Chinese equities would likely launch higher. This same guru has also said he hopes the Chinese government can stop the market from rising further and cool the bubble. If he understood history, he would realize he is wanting the Chinese government to do exactly what the U.S. Federal Reserve knowingly did in 1929. How'd you like that outcome? Did that do anything for you?

I find it more telling that true investing genius--Warren Buffett--recently sold out of his PetroChina shares while said guru blathers on about complete nonsense. The Chinese equity bubble is fundamentally much larger than the U.S. bubble was during its industrialization; 1929. The Chinese financial system is also significantly less mature than the U.S. system was in 1929 and the concentration of poor investment due to corrupt communist pet projects leads to substantially higher risk as well. In other words, guided investment based on corruption and pet projects rather than market based investments are making any negative outcome potential much more significant. And, given the Chinese consumer economy is nearly nonexistent in twentieth century terms, their industrialization bubble has all of the pieces in place to end very, very badly. That is, unless you believe communist central planning can mitigate market based outcomes. Well, do you? If you believe the Federal Reserve can save the U.S. economy, you indeed do believe in central planning as is nearly universally believed on Wall Street and main street. The outcomes will likely be substantially worse than 1929 and there is every reason to believe it will lead to significant socioeconomic volatility in China. Especially compounded by a society where human rights are suppressed. Read that social instability, widespread unemployment, communist crackdowns and potential revolution. So, that could mean a more repressive and dangerous China might develop if hard liners gain an upper hand and quell any potential social unrest.

Why have I been so outspoken on human rights? Because economics and volatility does indeed play a substantial role in human rights and vice versa. Sounds a little too bizarre to believe any of this could happen now doesn't it? Did what happened post 1929 sound bizarre in 1928? I hope I'm wrong about any outcomes but repressive regimes seldom go quietly (The USSR did and we can hope for something similar.) and we've seen this situation repeat itself time and again in history. And, the investment world and business community are completely oblivious to any risks. There's that doggone risk word again. But let's hope this one does. Both for the world and Chinese citizens.

On a final note, I'll give you something to think about. This is something I have wondered for quite some time. I have absolutely no reason to believe this to be true other than circumstances seem all too obvious to me. I could actually paint a very compelling picture that the U.S. government policies over the last decade and a half have actually created a destabilized China. And, that destabilization was accomplished while making China reliant on the U.S. for economic vitality, therefore mitigating risk of global military strife and maximizing the potential for economic and political liberalization. (Good risk management. ha.) All while the rest of the world, including China, is completely convinced the current incarnation of China will inherit the twenty first century. Do you believe economic sabotage or economic subversion has ever been used as a form of power and destabilization projected by governments? You should because it has. And if you don't believe it, why not? Who would benefit the most from a destabilized communist China? From a democratic China? From a China embracing economic liberalization? The U.S. in far too many ways to imagine. Wars are not always fought with guns. To me, it seems as though this outcome could easily have been plotted and many U.S. economic and trade policies have almost made it predictable. So, is there any way someone could have hatched this strategy? Is it really any different than Reagan's strategy that included both international political actions and military spending meant to drive the Soviet Union into a state of instability? Just something to ponder over that morning cup of joe.