China's market foretelling a Double Dip Recession?

Was perusing some of John Mauldin's postings and came across a guest article where the author posits that China is foretelling that the US is facing a potential Double Dip recession. He asserts that China's market leads the direction of US markets by at least 4 months. This would make sense as US buyers would require at least 1/2 year in "lead time" between goods manufactured in China, which would subsequently be shipped to the US for sale. Thus, China provides an interesting "Canary in the coalmine". This is all the more interesting given China's declaration over the weekend that they would show flexibility in pegging their currency to the USD. Some analysts are asserting they would not do this unless they felt confident about the stability of their economy. But other analysts suggest that China may actually find itself forced to devalue in order to improve the competitive desirability of their exports.

China: The Economic Elephant in the Room?

Figure 1 - Weekly chart of four major market indexes showing the Chinese Shanghai Shenzen Composite peaking along with the rest of them in October 2007 but bottoming well in advance of the others in spite of impressive Chinese economic numbers. So which indicator is right? Chart courtesy of GenesisFT.com.

Pay particular attention to the chart the author provides (as well as the notation below that chart that I posted above) showing the performance of the Shanghai index in comparison to the S&P500, the German DAX, and the Indian "Nifty" market.

For the past year, the Shanghai market has been in decline, having peaked in July, 2009. In comparison, the other 3 indices have continued their uptrend. The author, as I understand his comments, suggests that this would be an indicator that these three indices are due for a substantial pullback if they are resolve the divergence that exists with the Shanghai market.

The author also makes a compelling case that China is "cooking the books" and is in a SUPER-BUBBLE which, when it bursts, will have significant ramifications to global commodity prices.

The last thing the Chinese economy needs is a stronger Yuan, but they are facing tremendous political pressure from the G20 to let their currency appreciate.

Is it any wonder why Chinese officials have been so reluctant to let their currency, the renminbi, appreciate in response from demands from the U.S. and China's other trading partners? If the economy is in a bubble, the last thing it needs is a strengthening currency to exacerbate the problems.

The reader may also will recall my previous posting from Monday discussing the Ponzi Scheme that is Chinese real estate. Putting savings into a home, only to obtain a home equity loan against the appreciated value of the home, only to take the funds and RE-LOAN that money to a Loan Shark, who pays 20-150% interest (presumably charging their borrowers even more) is incredible, if true to the extent this is allegedly happening in Chinese "black markets".

Thus, in sum, if the Shanghai index is an indicator of the future for other global indices, that would suggest at least a 20% drop in the DOW and SPX.

Finally, I would offer this CNBC article by Herb Greenberg, which discusses how many Chinese companies have been engaged in reverse mergers into US corporate shells in order to gain access to US capital. Many American investors/speculators have been buying these up in the belief that the companies behind them have been properly vetted as legitimate companies. This could not be further from the truth as there are almost no mechanisms for legally requiring these Chinese companies to fully disclose, except US securities laws, which are extremely difficult to enforce against a Chinese company, even if it's stock is listed in the US.

Chinese Firms Using 'Back Door' to US Exchanges

Reverse Mergers often involve private US companies attempting to take the "fast track" to public status, avoiding the IPO phase, and the vetting that normally involves. Many of them are of extremely dubious credibility, if little more than scams and frauds, but they are accountable to US securities laws. So if the most common reverse mergers are "sketchy", having an unaccountable Chinese company go public in the US exchanges is potentially the quickest manner in which to lose your entire investment.

Most of all it's indicative of the "con-game" that China is playing against Western investors foolish enough to invest in China's bubblemania.

Scrutinizer