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China’s entering a depression right now. And this one’s going to be really bad…
Now, China should be known as the world’s greatest engineering and construction project in human history.
In a broadcast on China’s real estate bubble, 60 Minutes reports the country has been building between 12 and 24 new cities each year. It’s built dams, railroads, hospitals, bridges, highways, and factories… lots of factories.
To finance this growth, it sold trillions of dollars’ worth of products to the rest of the world. Everything was made in China. The money earned from these products paid for the development.
In 2008, the arrangement threatened to come undone. We experienced a global recession. And the rest of the world got better at competing with China.
As a result, demand for Chinese products declined.
In an attempt to stimulate its economy, the Chinese government borrowed $15 trillion in new currency. It dumped it into new construction projects… more cities, bridges, dams, railroads, etc.
(That $15 trillion dwarfs the amount the Federal Reserve used on all its “quantitative easing”—banker talk for money printing—efforts.)
You can see an example of the results—one of China’s famous “ghost cities”—below.
https://www.youtube.com/watch?v=2r_84fnKQco
During the “ghost-city boom,” China again sucked up the world’s copper, cement, oil, and steel. As a result, commodity prices soared. The Rogers commodity index doubled from 2009 to 2011.
Then, Chinese regulators eased stock market regulations. This ignited an investing boom in Chinese stocks. The Shanghai stock market went up 135% in one year.
The result?
Tons of debt, bad infrastructure investments, and cities that never needed to be built… And working-class people borrowing money to invest in stocks and factories producing goods for a world that doesn’t want them (or at least competing against other cheaper countries).
And then, two months ago, China’s Shanghai composite (similar to the Dow Jones industrial average) crashed. Some are now calling July 7, 2015, “China’s Black Tuesday.”
The Chinese stock market’s lost one-third of its value. That’s worse than the crash of 1987 in New York.
What happens now? It’s obvious to me.
First, China will enter an awful depression. The stock market will continue to fall, with lots of ups and downs for a few years. Unemployment will rise. Real estate will fall in value. And there will be lots of bankruptcies.
To “fix” the problems, the Chinese government has started devaluing the Chinese currency. This is an attempt to resurrect the old deal of China selling goods to the rest of the world, and using the money for internal infrastructure improvements.
I don’t think it’ll work.
Bottom line: Shorting China’s currency—and stock market—seems like easy money to me. And the easiest way to start short the Chinese currency (the yuan) is to stay long U.S. dollars. More to come here…
Reeves’ Note: China’s economic woes don’t exist in a vacuum… The tremendous volatility in U.S. markets is thanks, in part, to China’s market crash. If you haven’t done so already, take two minutes to watch Tom’s urgent cellphone update, below.
In it, he identifies what he’s personally doing to ride out the volatility. It’s the safest strategy for your money today.
