August 01, 2015
On the heels of another chaotic trading week in major markets, today one of the top economists in the world sent King World News an incredibly powerful piece warning that China's meltdown is already spreading as central planners prepare for global economic chaos. Below is the fantastic piece from Michael Pento.
By Michael Pento of Pento Portfolio Strategies
August 1 – (King World News ) – The Chinese stock market recently saw its biggest selloff in eight years as the dramatic 8.5-percent fall in Shanghai “A” shares also rattled markets around the world….
Continue reading the Michael Pento piece below…
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For the past few weeks China has been balancing its desire to keep the equity market from a complete meltdown with courting the international investment community in hope of being a dominant player in the capital and currency markets.
IMF Warns China
But recently the International Monetary Fund (IMF) warned China about its concern over limiting investors' freedom to take equity out of financial markets. These concerns were raised when the IMF met with officials to discuss the chances of including the yuan in the fund's basket of currencies, also known as Special Drawing Rights (SDR).
As China tries to cushion the demise of its equity bubble while maintaining the illusion of free markets, two delusional narratives have started to circulate on Wall Street.
What's Happening In China Will Reverberate Around The World
The first such Wall Street-inspired delusion is that the collapsing Shanghai stock market will have no effect on the underlying Chinese economy. But even though China's 260 million trading accounts may be a relatively small percentage of the country's population, it's also the richest and most productive portion, which also happens to be equal to the entire U.S. population in 1993. And Chinese GDP growth accounts for a third of total global growth. So we can already find the manifestation of slowing Chinese growth in the nascent fall in equity prices.
For example, the profit of China's industrial firms dropped 0.3 percent in June from a year earlier, reversing a 0.6-percent rise in May and 2.6-percent gain in April. For the first six months of 2015, industrial profits were 0.7 percent lower than a year earlier.
In June, China's producer price index fell 4.8 percent on an annual basis, its 39th straight month of decline. In fact, the economy is headed for its poorest overall performance in a quarter of a century.
The second fallacy is that Wall Street believes in the TV commercial that claims what happens in Las Vegas stays in Vegas. Or, in this case, what happens in the Chinese economy stays in China.
China Meltdown And Contagion Now Spreading Around Asia And The Pacific
But the meltdown in China is already spreading around Asia and the Pacific. For example, Taiwan’s year-over-year export growth has hit multi-year lows due to collapsing trade with China.
But perhaps the biggest indicator of the magnitude of China’s slowdown can be found in the global commodities market. Most pundits are trying to link the recent selloff in commodities strictly to the rising dollar as measured by the Dollar Index (DXY). But that Index is actually down about 3 percent since March. Since then the rout in precious and base metals, energy, and agriculture has greatly accelerated.
The Bloomberg Commodities index is now at a 13-year low. Copper is down 28 percent for the year, tin is down 30 percent, and nickel is down 44 percent.
And then we have gold. Last week China dumped 4 tons on the market, causing the price of the precious metal to fall almost 4 percent within a few seconds. This had little to do with the value of the dollar on the DXY, but it was mostly about the waning demand in China from its imploding economy and the need to sell what you can when capital controls are in place.
Indeed, these commodity prices began to plunge concurrently with China’s steep drop in officially reported GDP growth from 12 percent in 2010 to just 7 percent today. The real current growth rate in China is closer to 4 percent when measured by private data. It is no coincidence that the price of copper dropped from $4.52 to $2.37 during this time frame.
The True Message Of Plunging Commodity Prices
The true message of plunging commodity markets is that the Chinese government wasted $20 trillion worth of credit digging holes to ease the fallout from the Great Recession of 2007, primarily creating a huge fixed-asset bubble with little economic viability. And then China forced another $1.2 trillion in margin debt to engender a consumption-based economy, primarily by creating a stock market bubble after the fixed-asset bubble strategy began to fail miserably.
What Will This Mean For The World?
U.S. GDP is growing at a meager 1.5 percent for the first half of 2015. The second half looks even worse, as an organic U.S. slowdown meets cascading global trade. Adding to this malaise, it appears as though the handful of U.S. stocks that have led the rally are finally starting to join the hangover party. For instance, social media stocks are now crashing harder than commodity prices, with Yelp recently falling 27 percent in one day after dropping 60 percent year over year. Twitter has also tumbled 45 percent in the last 52 weeks, and Facebook recently dropped nearly 5 percent after reporting a miss in the number of eyeballs staring at cellphones checking the "like" box.
But here is the most important thing: The arrogance that led the Federal Reserve to believe that it could save the world in 2008 by manipulating markets is causing Janet Yellen and Co. to promulgate the idea that the Fed can now raise rates into a global slowdown without negative repercussions, thereby, demonstrating the Fed's success in rescuing the economy from the Great Recession by proving that interest rates can now rise with impunity.
But the Fed hasn’t raised interest rates in a decade and will probably never be able to move much outside the zero-bound range without collapsing markets and the economy. I think the Fed is aware of this and that’s why it is always finding excuses not to start a rate hiking cycle, just as it did again at its July meeting. So the real money to be made is in fading the massively overcrowded trade that believes that U.S. stocks are immune from the worldwide economic slowdown and that the U.S. dollar will be in a secular bull market.