Even the BRIC (Brazil, Russia, India, China) countries are decoupling? For those who have not been paying attention to the carnage that is the Shanghai market, it is down well over 50% in under 3/4 of a year. I was predicting in late summer/early fall China’s domestic shares would implode…[Aug 28: China "A" Shares Bubble] [Sep 1: The Growing Bubble in the Shanghai Index]

By October when “everything China” peaked (always look for obvious signs like a company in China worth $1 trillion, double the largest value in the US market) [Nov 1: PetroChina the 1 Trillion Dollar Company? Is *this the top?] – news articles and financial magazines were touting how you must be in China – every CNBC story began with the lead in … “China”… and we had sure sign things were getting obnoxiously ridiculous. (today we can replace “China” with the word “oil” and this is why I believe we are going to have a serious correction coming in the 2nd half of 08 in that frothy market as well) After something goes up annualized 30% a year for 5 years, it’s really a bit much to ask for that to continue (China or oil); things revert to a mean. [Apr 3: To See a Stock Market Bubble Bursting, Look at Shanghai] That said, articles like this make me a bit more bullish on China and India net net even though I agree with the thesis that inflation is wrecking havoc… but that goes for every country, not just these 2. As I wrote a while back, China is like an out of control Ferrari driving on a mountain road full of oil slicks. You know eventually bad things are going to happen.

As I’ve been repeating for months, inflation is a tax on all things – producers and consumers. Steel costs are impeding projects and causing issues for industries such as autos, ship building, various construction – energy costs are hindering growth across the industry spectrum, etc. The higher inflation goes the more likely a global recession begins. Seems improbable? Keep in mind in 2006, I believe something like 152 countries showed positive GDP growth (much of it based on easy credit era) – so there is no reason the opposite cannot happen. That said, by “slowdown” in China we might be talking +5-6% GDP growth, as opposed to +10-12%. But many other countries could be facing negative growth…. those whose governments accurately report GDP (Gross Domestic Product) that is. Wouldn’t it be a miracle if the one country that is the nexis of both the housing bust and the credit bust was able to never show a negative GDP quarter, while the rest of the globe suffered? haha. Yes a “miracle”. [May 1: Is it an Official Recession? NY Post Says it Should Be]

• The world’s fund managers are pulling their money out of China and India at a record pace on mounting fears of inflation and are now more pessimistic about global equities than at any time in the past decade. (reversion to mean)
• The latest survey of investors by Merrill Lynch shows that Europe has become the most unpopular region, while Britain is still trapped in the doldrums.
• But the big surprise is the sudden change in view on the emerging powers of Asia, as overheating and spiralling oil costs spoil the boom.
• The vast majority of fund managers think earnings forecasts have lost touch with reality. (thank you, money managers for getting on my boat)
• The exodus from China reached fever pitch this month as investors slashed their net “weighting” position to -58, down from -14 in May. The Shanghai bourse had already fallen by almost half since October. The fund managers have been slow to sense the danger.
• India fell to -63 as investors took fright at the country’s budget and trade deficits. There is concern over a relapse towards Nehru-era policies after Delhi halted trading in a range of commodity futures and restricted rice exports.
• The survey of 204 fund managers worldwide suggests that the love affair with emerging markets is going cold. The net weighting was -63 for Chile, -47 for Taiwan, -37 for Korea and -32 for Poland.
• Mr Bowers said investors no longer believe that the bloc has a grip on inflation. They are discriminating between the commodity producers and those that rely on imports of oil, minerals and food.
• Fund managers are still super-bullish on Russia, betting that the energy boom has life yet. A net 62pc are overweight oil and gas shares. The most hated trio are travel and leisure (-66), banks (-62) and property (-60). (those that have hard assets will win in the end)
• Karen Olney, Merrill’s European equity strategist, said oil is nearing its cycle peak. “Is the trade too crowded? Probably. As long as fundamentals remain strong, we retain our overweight stance,” she said.
• A record number (net 29pc) are now underweight on European equities; many have switched into cash as they wait for the European Central Bank to inflict punishment – ever more likely after eurozone inflation reached an all-time high of 3.7pc in May.
• Mr Bowers said Europe is now facing a triple whammy as the downturn in global export markets combines with a strong euro and a monetary squeeze.
• Merrill Lynch said fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off “civil protest” in Argentina, Indonesia, South Africa and the Gulf states.
• As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street – despite a chorus of pessimists. A net 23pc are overweight US equities, the highest since August 2001. (ah, the irony in it all)

Once we get through “this”, however long “this” is or how painful “it” is, China and India should be setting up for another great buying opportunity. Demographics are destiny. But the question is will we be waiting months, quarters, or years to catch the next bottom?

[Jun 2: China Leads Asia Retreat from Inflation Battle]

Last 5 posts by Trader Mark

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