(Mike Larson is off today. Boris Schlossberg, a new member of the Money and Markets team, has filed this special report. Mr. Schlossberg, along with Kathy Lien, has vast experience forex trading and has been a regular commentator for CNBC and is widely quoted in the financial press.)
Over the next few weeks, you will no doubt see a parade of talking heads try to reassure you that the worst is over, that growth is just around the corner and that China has found its footing.
Because ultimately when you talk about global growth you are really talking China. Where else is growth going to come from? The Middle East — where $30/bbl oil is creating conditions where Saudi Arabia could run a budget deficit one-fifth of it GDP? Europe — where sclerotic growth is now exacerbated by a refugee crisis and the rumblings of a bank run in Italy could ultimately create $1 trillion in write-offs at the region’s banks? North America — where Canadians suddenly can’t even afford a flight to Fort Lauderdale, and Americans appear to be locked in a political equivalent of an comic opera and have essentially stopped spending money at the mall?
|Are the lights about to go out on economic growth in China?|
No, when it comes to incremental growth China is the only game in town. It’s the net marginal buyer of everything — cars, movies, iPhones. Just ask Tim Cook, who looked dour and depressed at this week’s quarterly earnings call, despite Apple making more money than most countries in the world. Cook sees the writing on the wall. The go-go days of easy money and endless growth in China are over. The Shanghai market meltdown blew up a lot of wealth and whatever is left is leaving the country by any means possible.
A few months back, Bloomberg ran an amusing story about how the Chinese will use anything from money-changers in Hong Kong to human mules with stacks of yuan taped to their bodies to smuggle out more than the $50,000 limit allowed by Chinese law. The story would be amusing were it not a telltale sign of deep trouble in the Middle Kingdom.
Having been born in an authoritarian country I learned a key lesson very early in life. If you want to know the truth in a closed society, don’t listen to the man on TV, watch the guy on the street. And what that guy is saying right now in both Mandarin and Cantonese is — run and get my money out!
Why else would Vancouver real estate rise by 15% at a time when Canada’s key source of income has fallen by nearly two-thirds and the currency is quickly approaching 65 cents to the buck? Why else would New York developers build not one, not two, but three high-rise apartment buildings right across the street from me at a cool $4.5 million per unit, blithely ignoring the fact that these building sit right next to a NYFD firehouse that blasts sirens 24 hours a day, 7 days a week. The Chinese are clearly not looking for return-on-capital; they are just looking to preserve whatever they can.
The talking heads will make all sort of soothing noises. They will claim that China’s FX reserves are so large that they can withstand all this capital outflow. They’ll say that the capital account still generates $400 billion of surplus a year. That all of the recent clamp-downs by the authorities have bought the country another 12 to 18 months worth of peace.
|“China will have to devalue the yuan and the fallout from that move will be felt on this side of the Pacific.”|
But here is the only fact that you need to know. Over the past three years, China used more concrete than the U.S. did in all of the 20th century. Just think about that for a second. More than all the pre-WW2 years of constructing the Empire State Building and Woolworths and all the post-WW2 years of building the National Highway System and all the skyscrapers of Chicago and New York. In just three years. That’s probably the greatest example of mal-investment in the history of mankind. And it’s not going to end well.
The junkets to Macao, the ghost cities, the massive theft and corruption by the party elite. It’s already starting to catch up with the country and the first point of pressure will be the currency. As debt-fueled projects begin to collapse, China will have to devalue the yuan and the fallout from that move will be felt on this side of the Pacific, despite the misleading assurances that trade with China represents only “1% of our GDP.”
It may happen soon, or it may take a few quarters to truly unwind, but it will happen as surely as the sun rises in the east, which is why complacency will be very expensive for investors who remain lulled by Wall Street’s soothing noises.
(P.S. Registration for next week’s three-part series — “3 Shocking Forecasts for 2016″ with Kathy Lien and me is closing! Make sure you click this link to register before it is too late!)
Mike Larson will be back Monday with his reactions to your comments from this week.
Global shares rallied overnight after the Bank of Japan moved one of its main interest rates into negative territory in an aggressive step to re-inflate its economy. The BOJ said it would charge 0.1% for excess reserves and may cut rates further if necessary, a policy resembling one already taken by the European Central Bank. Moves such as this aim to give banks an incentive to boost lending, which in turn should help fuel economic growth.
America’s iconic Xerox Corp. (XRX) will separate itself in two businesses and give several seats on the board to activist investor Carl Icahn, leading to an end of its historic efforts to combine business services with copiers and printers, the Wall Street Journal reports. Xerox will become two publicly traded companies, the report said. Icahn will receive three seats on the services company’s board. The billionaire said in November that he would seek talks with the company about its future. Icahn’s hedge fund has an 8.1% stake in the company and is now the second-largest shareholder after index giant Vanguard Group.
Authorities allege that the suspected mastermind in the escape of three inmates from a California jail had help from a woman whose English classes he was taking while locked up, authorities allege. Escapee Hossein Nayeri, 37, became acquainted with Nooshafarin Ravaghi, 44, during English-language classes in the Orange County jail, the sheriff’s department said. That led to her helping him and the others to break out of the jail and led to her arrest Thursday, the authorities said. One of the three escapees surrendered to police Friday, authorities said.
The Money and Markets team