Three weeks ago, I updated my warning about the possibility of a major recession in China. The Chinese investment bubble may have burst. Today, we got another bit of information about the Chinese economy that reinforces that view in my opinion. China’s National Bureau of Statistics and the China Federation of Logistics and Purchasing showed that June PMI came in at 50.2 compared to 50.4 in May. Many of the articles regarding this statistic trumpet the fact that the number is "above expectations". This misses the point. The Chinese economy, long the most vibrant in the world has a PMI which at 50.2 is just two tenths of a percent above the figure for contraction. (any number below 50 show contraction rather than growth.) To make matters worse, many economists think that the Chinese figures are always padded a bit to look better than they actually are. If that is the case, then Chinese manufacturing is already contracting.
The latest figures are ominous for the world economy. Clearly, growth will not come from Europe which is in recession. America is barely still growing and cannot lead the world back to robust growth. Japan is just as stagnant as usual. Chinese demand was the only other major source that could support some sort of rebound from the current malaise.
I hate to write in gloom and doom fashion, but I have to say that the economic portents are not good ones. It is time to get rid of stock in companies that depend on Chinese demand. That includes all of the commodity stocks with the exception of gold. It includes all Chinese companies. It also includes shipping stocks although these may get a break if the current decline in fuel costs continues; the decline will not provide demand for their ships, but it may cushion the blow as demand declines. You can probably hold the dry bulk carriers for now but keep a close eye on them. I would also stay away from financials. As the world economy declines, we may soon see more negative fallout from the European mess.
I am more gloomy now than I have been in years.
DISCLOSURE: I have only small investments remaining in the areas mentioned above. I have been withdrawing from these areas and intend to continue to do so although that may change as market conditions change.
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