The Red Zone

If you have ever run a long distance race, you know that going too fast will exhaust your endurance and your body will break down and slow you down for the rest of the race. But if you run too slow at the beginning, you are putting yourself too far behind others. You need to run fast enough to keep a good pace, but not so fast that you hit the red zone.

Well, China has been the rabbit, running at a ridiculous and unsustainable pace for the past several years. Now they are in the red zone paying a heavy price. There is too much capacity, too many ghost towns built, too many empty uneconomic buildings. The return on capital for most new construction projects is deeply negative. This has put a huge burden on the Chinese banks who are holding the toxic loans for all these projects. Add in the real estate bubble and you have a disaster. 

A soft landing hard landing debate misses the point. This is a crash coming after a popping of a real estate bubble. It is not a part of the economic cycle. It is a popping of the massive bubble in Chinese centralized planning. The Chinese officials thought that they had solved the economic cycle and could get rid of busts and just keep booming.  Capitalism doesn't work that way, even if its krony capitalism.  We are beginning to see investor nervousness about China, something we haven't seen before, I am seeing more CNBC guests worried about China.   China naysayers like me used to be ridiculed last year for ringing alarm bells, are no longer. There are more joining the China bear camp.   This migration once fully mobilized, will cause a Chinese equity market and real estate panic.  It should happen sometime in the fall, similar to the Euro scare last August, and that will crush commodities and drag down equities with it. 

Bearish.  Earnings will pull down the market.  Stay short.