Downshifting into neutral
I left for China on July 11 for an
extended trip to tie up some loose research ends on my forthcoming
book The Coming China Wars. Before I left, I threw on a QQQQ short just
as a hedge on my long positions. Today, almost a month later, that QQQQ short is
within pennies of the price I put it on — market gyrations aside. And that’s
precisely why before I left, dear reader, I urged you all to go flat and go to
the beach as this summer the market is sorting out a number of conflicting
forces.
Today, however, the picture is becoming much clearer. The ECRI
Weekly Leading Index now projects an economy that is close to the flat line — an
anemic 0.1% annualized U.S. growth rate. That’s a recession in anybody’s
playbook — through technically not such — and it certainly justifies the flat
and inverted yield curves that have been yo-yoing us for months.
The Fed’s current conundrum, of course, has to do with why
inflationary pressures continue to build. Wage pressures are rising because most
American corporate executives are too stupid to see the slowing economy ahead
and they keep hiring at premium wages — and see my book The Well-Timed Strategy
for lots of evidence of this stupidity.
As for commodity prices — oil, steel, cement, etc. — that gets
us back to the China beast. While Europe and the U.S. economies are flat-lining,
China is growing 11% a year and it’s been maintaining this double digit pace for
over a decade. Besides all of the obvious manufacturing activity been moved to
the PRC, Beijing is building for the 2008 Olympics and Shanghai is readying for
the 2010 World’s Fair. Not surprisingly, the PRC booming. And while I won’t bore
you with the details of a trip that went from Hong Kong and Guangzhou in the
South to Beijing, Tianjin, Dalian, and Shanghai in the Northern area, I will say
that the scariest site I saw was the mouth of the Yangtze River in Shanghai
stuffed with more cargo ships than even the most fertile imagination could
envision. This is a country that is kicking the world’s butt and, as I document
in my new book, China is doing so by bending or breaking many of the rules of
the free and fair trade road.
This Week’s Market Movers — Ironies Abound
On Tuesday, the Fed will meet to parse this conundrum. The
bond market crowd — led by Pimco’s Bill Gross — is trying to get out in front of
the Fed and bend it to its “halt the rate hikes†will. Given that chorus and the
obvious signs of economic stagnation building, I’m not interested in taking the
opposite side of the bet. On the other hand, it’s pretty damn clear there is
plenty of inflation left in the economy. That’s why it would be really ironic if
on Tuesday the Fed declares a halt and the Q2 productivity numbers come out with
productivity way down and labor costs way up signaling lots of inflation.
As for the other potential market movers, the trade report
always has the potential of roiling the dollar, then bonds, and by extension the
stock market. There’s little evidence of course that that report will do
anything other than document another whopping deficit — dollar down, gold up,
no?
Peter Navarro
Peter Navarro is a business professor at
the University of California and the author of the best-selling investment book
“If It Rains in Brazil, Buy Starbucks.†His latest book is
The Well-Timed Strategy.â€