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Generational Dynamics Web Log for 13-Jun-2008
Shanghai China stock market and Baltic Dry Index are crashing sharply

Web Log - June, 2008

Shanghai China stock market and Baltic Dry Index are crashing sharply

Developing country economies all appear to be collapsing.

Shanghai stock market index, for two years ending June 11, 2008 <font size=-2>(Source: MarketWatch)</font>

Shanghai stock market index, for two years ending June 11, 2008 (Source: MarketWatch)

Shanghai's Stock Exchange index has fallen to new 14 month lows, as can be seen from this graph.

Investors held a public protest outside the stock exchange building on Thursday, representing millions of individual investors who have lost their life savings. One slogan compares the stock market crash to the earthquake carnage: "More than 100 million investors have been buried in the ruins of the stock market by the earthquake in China's capital markets. Most of them are dying."

I last mentioned the crashing Shanghai stock market in an April 22 posting, but amazingly, it's never even mentioned in the news. Nonetheless, it's a major catastrophe for China.

I've mentioned many times that there's a good chance the China is going to fall off a cliff economically, once the Beijing Olympics games end in August, without knowing whether it's going to be a small cliff or a large cliff. But with the Shanghai market in full-scale crash mode, the evidence is mounting more and more that it's more likely to be a large cliff.

There's very little news being reported about China for the past several weeks, thanks to the devastating earthquake carnage. The earthquake remains a continuing story, thanks to this incredibly dramatic "quake lake" story: the rubble from earthquake landslides blocked water flows, forming an enormous lake that threatened millions of people with drowning if the rubble broke free. It's only been in the last week that Chinese engineers managed to clear the largest quake lake by creating a small channel through the rubble by means of anti-tank weapons.

These incredibly dramatic stories have swamped all other news coverage coming out of China, even Olympics coverage. And yet, the earthquake can only have increased the damage to the Chinese economy related to the stock market.

Baltic Dry Index, for 200 days ending June 12, 2008 <font size=-2>(Source: InvestmentTools.com)</font>

Baltic Dry Index, for 200 days ending June 12, 2008 (Source: InvestmentTools.com)

Another sign of devastating economic changes in China, this time with a broader global significance, is the crash of the Baltic Dry Index, as illustrated by the adjoining graph. The BDI is a measure of the price of shipping dry goods around the world, and its recent bubble prices have correlated to the bubble growth of the Chinese economy, which has been importing all kinds of raw materials from around the world.

According to a published analysis:

"Cantor Fitzgerald analyst Natasha Boyden said in an interview the significant drop was the result of Chinese iron ore importers working through their stock piles of the commodity instead of bringing more into the country. With the huge demand for iron ore, steel and other commodities carried by drybulk ships soaring, Boyden said Chinese importers turned to their own supplies as ports clogged and drybulk rates skyrocketed.

But Fitzgerald noted that the Chinese only have about three to four weeks worth of iron ore stockpiled. After its resources are used up, Boyden said drybulk ships will again be in high demand to deliver goods to the country.

"This (pull back) is merely temporary," she said. "Painful, but temporary."

JPMorgan analyst Jonathan Chappell said in a client note that he expects the Baltic Dry Index to continue to fall through the third quarter, as the typically slow period will be compounded by an expected lull in trading around the Beijing Olympics and further draw downs of existing inventory by Chinese steelmakers."

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Shanghai China stock market and Baltic Dry Index are crashing sharply: Developing country economies all appear to be collapsing.... (13-Jun-2008)

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These analyses support my own view that the Chinese economy will be falling off a cliff after the Olympics games. In fact, this fall in the BDI appears to indicate that Chinese manufacturers are already severely cutting back, as the frenzied building activity in preparation for the Olympics is already coming to an end.

According to an analyst interview on CNBC on Thursday afternoon, all the emerging market countries are having serious economic troubles, led by the BRIC (Brazil, Russia, India, China) countries.

According to Peter Stock, President & CEO, Stock Investment Management:

"For some time we've discussed the cracks in the emerging markets story here, starting with Iceland, Vietnam, China. And the latest appears to be Russia. They're running with a 15% inflation rate now, the ruble appears to be breaking out of a band that it's been in for some time in order to combat that inflation. Russia's been the recipient of a lot of hot money flows, as a beneficiary of the carry trade. That story is starting to pop up on my screen.

This week we had the Dong [the Vietnam currency] devalued in Vietnam, stocks down 25 out of 26 days, India raised rates for the first time in 15 months, China stocks remain in a swoon. It's interesting, you know, nobody's really talking about that too much - the stock market's off there about 10% in the past week. Last time that happened, everybody headed for the hills.

[In response to the question: What's the worst case scenario?] I use a pressure cooker analogy. All these emerging economies -- one by one they're being thrown into it. The pressure's building, but unfortunately there's no policy release valve here. The central banks, for whatever reason, are not acting quickly and decisively enough, and appear to have no sign of willingness to do it.

So that raises the risk to me of a crisis occurring in one of these countries -- I'm not quite sure which one -- but I have my guesses -- the obvious choice would be a Vietnam or somebody like that. Then we go to the knock-on effect. I was front-row center for the Asian contagion back in 1997, and frankly I don't want to see that again.

The BRIC wall -- the bricks, one by one are coming down here -- they accounted for half of global growth last year. I'd avoid the asset classes generally for emerging markets, and specifically the BRICs. I mentioned DUG [the exchange-traded fund that bets against oil] before - a good way to short oil. Oil's obviously been a big beneficiary of global growth coming out of these areas. And I'm still bullish on America. I'm underweight emerging markets, and I'm overweight US stocks."

The above comment by Peter Stock describes what he sees is a dangerous, growing problem in emerging markets outside the US, although he sees no particular danger on Wall Street.

I keep talking about "tipping points" on this web site -- spiking oil prices, spiking food prices. In fact, the above interview on CNBC was followed immediately by another story -- the disastrous summer corn crop, raising world corn prices to yet another historic high.

What Peter Stock is describing is tipping points that are being reached in all the emerging market countries. What he doesn't understand is that, unlike what happened in 1997, a collapse in emerging markets will also cause a collapse on Wall Street.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (13-Jun-2008) Permanent Link
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Generational Dynamics Web Log for 13-Jun-2008 Shanghai China stock market and Baltic Dry Index are crashing sharply

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Generational Dynamics Web Log for 13-Jun-2008
Shanghai China stock market and Baltic Dry Index are crashing sharply