| [img]http://www.joe-duarte.com/images/line_main_top_01.gif[/img] | April 18, 2011, 08:00 EST | [img]http://www.joe-duarte.com/images/line_main_top_05.gif[/img] | [img]http://www.joe-duarte.com/images/000.gif[/img] [img]http://www.joe-duarte.com/images/pic_03.gif[/img] |
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U.S. stock index futures were lower on Monday.
Detroit turns on unions. According to TheWall Street Journal: "A new state law has emboldened the Detroit mayorand schools chief to take a more aggressive stance toward public unionsas the city leaders try to mop up hundreds of millions of dollars inred ink." China raises reserve requirements, continuestightening of monetary policy. According to Reuters: "Chinaraised banks' required reserves on Sunday for the fourth time thisyear, extending the fight against excessive liquidity and stubbornlyhigh inflation in the world's second-largest economy." Saudi Arabia reduces oil production. OPEC washeshands. As gasoline prices have risen to $4 per gallon in theU.S., the world's largest oil producer, Saudi Arabia has cutproduction. According to Reuters: "Saudi Arabia's oil minister said onSunday the kingdom had slashed output by 800,000 barrels per day inMarch due to oversupply, sending the strongest signal yet that OPECwill not act to quell soaring prices." The report added: "Oil ministers from Kuwait and the United ArabEmirates echoed Saudi Arabia's Ali al-Naimi's concerns about oversupplyand said rocketing crude prices were out of the hands of OPEC, whichnext meets in June." |
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| Corporate executives and strategistsare wondering if their long term plans are about to run into theinflationary headwinds in China. And many are having second thoughtsabout their exposure to the Chinese economy. The weekend's raising of bank reserve requirements is the seventhtightening move from the Chinese central bank over the last severalmonths. Yet, the economic statistics show that growth remains robust,with the latest GDP figures showing a 9.7% growth rate accompanied byrapidly rising inflation at both the consumer and producer level. Forcompanies, though, the big problem is the pressure on wages, whichessentially ends the low cost end of the production schemes manycompanies have used in their Chinese business model. As wage pressuresgrow, so do profit margins shrink, unless they are accompanied by pricehikes at the retail level. That's the problem that companies such as Wal-Mart are now facing. ForChina's government, the situation is different. Inflation can lead tosocial unrest. And with the wave of uprisings in the Middle East, theChinese government is fearful of similar problems in their country.With food prices "soaring" at a 5.4% annual growth rate, the Chinesegovernment has implemented agricultural subsidies and "tried to forbidsome Chinese companies from raising consumer prices," according to TheNew York Times. Yet, the central issue in China may be housing. Rising property prices,fueled by speculation, continue to plague the economy, in a place wherebuilding is rampant, and where large numbers of apartment buildings,reportedly, remain empty, due to the fact that large numbers of peoplein the population still can't afford the inflated prices. According tothe Times: "The average apartment in central Shanghai now costs morethan $500,000. Even in second-tier cities like Chengdu, in centralChina, the price of a typical home costs about 25 times the averageannual income of residents." Much of the inflation problem in China is self induced. The governmenthas funded huge building projects, including high speed railways andhighways. Yet, external factors, such as rising oil prices, are alsoplaying an important role. And now, China is becoming a victim of itsown sucesses. According to The Times: "As the world’s largest carmarket, China’s demand for fuel is soaring, and gasoline prices areclose to $4.50 a gallon, up from $3.82 a gallon in late 2009." What's interesting, and alarming, is that Beijing's current boom cameas a result of easing of monetary policy after the 2008 subprimemortgage crisis shook the global economy. The problem is that despiteaggressive tightening, there are no signs that growth and inflation areslowing. That means, that unless something changes, China will continueto tigthen monetary policy for the foreseeable future. If history holdsup, at some point, the whole thing will slow enough to trigger apotential crash. In a country where apartment buildings are emptyduring a boom, you have to wonder what will happen if there is a bust. The fact that global investors have put significant amounts of money inChina also points out the next possible contagion. To be sure, we'vebeen bearish, and wrong on China for years. The country's successeshave well outpaced anything we would have expected. And that means thatwhen the crash eventually comes, we'll be so numb that we may not reactquickly enough to it. How will China's bubble bursting be different than others? According toThe New York Times, the damage may be more directly linked to thegovernment, given the fact that the state owned banks have been thelargest lenders involved. It's hard to predict what would happen inthis case, since there is no one to bail out the Chinese governmentthat we can think of, except other governments. Then you get into thepolitics of things. The E.U. has little trouble conceptualizing abailout of Ireland, Portugal, and even Spain, if that comes to pass.But if China crisis, the situation is more complicated, given theadversarial nature of China's relationship with some countries aroundthe world, on some levels. Yet, China's government and its political apparatus remain misteriousin many ways. That means that things there are unpredictable. In otherwords, the big uncertainty remains. Conclusion The bursting of a real estate bubble in China would be disastrous. Yet,history suggests that it is inevitable. If you have empty apartmentsand you have limited amounts of money in the hands of the many, theapartments will remain empty. There is only so much central planning and smoke and mirrors will hideover time. And it is possible, although certainly hard to predict, thatChina's time is running out. One thing is certain. Inflation is on therise in China, and that is changing many of the dynamics that investorsand corporations are having to deal with. The key is that China has survived every other reason to crash. So, itis not out of the realm of possibility that they will escape this onetoo. It just seems as if this time around, it's going to be harder forthem to escape completely unscathed. To read more about the evolution of the Social Cycle, and to get a gripon realCHANGE that lies ahead, read "The New Golden Age". Prepare for an uncertain future.Get a detailed trading plan in your pocket. Read Dr.Duarte's All NEW Books |
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