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The China Market Bubble

Written By Brian Hicks

Posted March 13, 2008

Standing in front of the meat case this morning, it hit me like a ton of bricks. It wasn’t an epiphany exactly, more like the feeling you get when the cleat of reality kicks you where it counts.

"It can’t be," I thought to myself as I ransacked the case, checking out the price of every piece of ground beef that I could find.

But it was true. At the Giant this morning, ground beef was selling for $4.89 a pound. And it wasn’t the high-end stuff either, it was 80/20. It totally blew me away.

$4.89 for ground beef? You have got to be kidding me. People can’t afford that.

But as bitter as I was at the thought of a $12 meatloaf, it occurred to me that my resentment was probably nothing compared to what Chinese consumers are going through these days.

And it reminded me of the chinese market bubble and why it is definitely not too late to go short on China–even with Ben Bernanke throwing money out of the helicopter as fast as he can.

The China Market Bubble Story

You see, while the rising prices that we have seen here lately are pretty painful, they are really nothing compared to the inflation rate in China. For Chinese consumers, it is more than twice as bad, clocking in at 8.7% year over year according to data released on Tuesday.

That was the highest inflation reading in China in over eleven years.

And as with us, it is in the grocery store that the Chinese have been really robbed. Food makes up a full third of Chinese consumer spending. Grocery store prices there rose 23.3% last year, according to the National Statistics Bureau, led by a whopping 58% increase in the price of pork alone.

In fact, rising food prices have become such a problem in China that the communist government is now actively doing everything it can to keep them down in hopes of heading off a serious political backlash. That includes numerous interest-rate increases and price controls.

But it’s not just the weakened state of consumers here and in China that leads me to believe the Chinese market bubble is about to collapse. The technicals also show me it is not too late to short China.

The Chinese Death Cross

Here’s why.

It’s known to technicians everywhere as a death cross, and it is happening on the Shanghai Composite Index. That’s the index that has jumped by over 450% during the last two years–a sure sign of a speculative bubble.

A death cross is formed when the 50-day moving average of a stock falls below (crosses) the 200-day moving average. It indicates that there are currently more people selling than buying the stock. It is as bearish as it gets.

And it’s not the first time the exchange has seen the "death cross," either.

Take a look:

death cross

As you can see, the death cross came twice on the index over the last five years, first in 2003 and later in 2004. Each time, of course, the index dropped dramatically, culminating in a 50% decline over all.

And while a third death cross hasn’t actually completed yet, the Shanghai Composite continues to drop even as a Bernanke-inspired rally pushes the Dow higher. The index actually lost nearly 3% on the same day the Dow rallied 440 points.

So is it too late to short China by going long the UltraShort FTSE/Xinhua China 25 Proshare ETF (AMEX: FXP)?

Not at all, when you consider how rising prices worldwide will slow down consumer spending here and abroad.

And if you need proof just make yourself a meatloaf. But also remember what it must be like to make one China.

High inflation kills growth every time.

Your meatloaf-making,empty wallet having, wondering where it all is going to come from editor,


Steve Christ

Wealth Daily