We believe China has reached its Bear Stearns moment and that the U.S. is about to relive the Lehman Brothers version. The week of March 17 marked the six-year anniversary of the Bear Stearns collapse and with it came intensifying talk of a new worldwide stock market bubble. Three areas make us question the price of most assets and wonder if they are on the high side of fair value. Extreme caution is now needed.
The first area of concern is that China’s economy appears to be crashing. We predicted this about 8 months ago, but it is really star ting to show up now. On March 3, China experienced its ’s biggest trade balance miss and its second-largest deficit on record. Chinese exports plunged negative 18.1 percent year over year, which reverses an expectation of a positive 7.5 percent rise. This is a six standard deviation miss and that is huge when it comes to rea ding metrics. Even exports to the rest of the BRICs (Brazil, Russia, India and China) were down over 20 percent. We think it’s fair to say even the contagion in the emerging market crisis is deepening and spreading. This is why we continue to point out that emerging markets are looking for an excuse to drop deep. This excuse is a really good one.
The second area of concern is that the U.S., for the third month in a row, had factory orders miss expectations with a major downside revision to the December 2013 data point of negative 2 percent. This means it’s fallen two months in a row. Even worse are rising inventories in nine of the last 10 months, which is the highest level since the government started tracking this metric. Given the negative this could be for the U.S., we’d better hope that the pent up demand starts kicking in and U.S. consumers begin buying stuff again or our consumer driven economy will be in big trouble. Nearly 75 percent of the U.S. economy is consumer driven.
The third area of concern last month was that both China and the U.S. have credit excesses to work off because today it is worse than before the 2008 crash. Both the U.S. and China have been printing money with no end in sight. In the last five years, the total assets on U.S. bank books have risen by $2.1 trillion. At the same time, Chinese bank assets have blown up to an unprecedented $15.4 trillion. While the Federal Reserve was injecting $85 billion per month into U.S. banks for a total of $1 trillion in just the trailing 12 months ending September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion. So we are asking if China has reached its Bear Stearns moment and is the U.S. about to relive the Lehman Brothers version?
The World Economic Forum is also asking this. “Fiscal crisis triggered by ballooning debt levels in both China and the U.S. pose the biggest threat to the global economy in 2014," the forum wrote last month.
So will China and the U.S. mark Bear Stearns’ less than joyous anniversary with another less than joyous negative economic event?
Dawn Bennett is CEO and founder of Bennett Group Financial Services. She can be reached at email@example.com.