The Dow Industrials, the S&P 500 and the NASDAQ have all formed a triple top. One top was formed in November 2017, the next in November of 2018 and now in May 2019. However, like ‘Pavlov’s dog’ everyone is conditioned to be bullish, as everyone thinks the economy will continue to prosper and President Trump will negotiate a good deal with China. What if that is not true?

I don’t know what will start the chaos of the next Bear Market or from where it will come and I don’t know when, but whatever it is, it will probably come as a surprise. Maybe it will happen from the surprise effect of early global warming or a surprise Chinese collapse. Maybe the world economic weakness is China?


George Soros has just been recently quoted as saying, “China has a major adjustment problem. I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”  China continues to show lackluster economic growth. China’s rate of growth of its loans, is far above their growth rate of money supply. China’s debt is 2.5 times its GDP. China is using its currency to buy as many companies in the West as it can, while it can. Just as has happened to Japan in the 1990’s, the same deflationary scenario could begin to occur in China.

 The Chinese currency has dropped to its lowest level in many years.  Tariffs could toss China into a recession, where growth is already slowing. China’s banks have given loans to questionable government sponsored companies. Now, $1.3 trillion of corporate loans are owned by companies were profits will not cover their interest payments. The rating agencies think everything is fine. However, remember, these very same agencies rated worthless CMO’s in 1968 as AAA. The problem in China could trigger banks losses that could start a worldwide recession. Money is flowing out of China. Tariffs will increase the problem. While some manufacturing jobs may come back to the US as a result of the tariffs, more jobs domestically may be lost, because the average American would have less spending power. The Peterson Institute for International Economics estimated that rather than bringing back jobs, Trump’s proposed tariffs could ‘result in a trade war and cost our economy more than 5 million jobs and possibly lead to a recession’.

I believe China is a ‘paper tiger’ that is not as big or as strong as it appears and is hampered by cronyism and corruption. Although China has a supposed $375 billion trade deficit with us, the actual figure is much smaller. For example, the export value given to the Apple X I-phone is $378. China contributes only $14 of the total cost for assembly while the rest of the cost is run through supply chains in the US and the rest of the world. Our trade balance ignores the value created by other countries that have preceded China in the chain. Tariffs may kill more jobs than it saves. In fact The Foreign Policy Association estimates that one dollar spent on Chinese imports is about 75 cents that goes into the US economy and that every job created in the metal industry through tariffs, would eliminate 16 jobs in other industries.

China doesn’t even believe its own statistics, as China’s provinces are growing faster than the whole. The China inflation rate is a government secret as they print money indiscriminately to bolster its shaky growth figures. Our Federal Reserve estimates that the US net worth is $60 trillion larger than China and yet, China’s money supply is estimated to be 75% larger than the US.

With 20% of the world’s population they have only 8% of the world’s arable land and 10% of that is reported to be polluted. Coal still provides 70% of China’s power, creating 16 of the world’s most polluted cities. About 435 of China’s 660 large cities are suffering from severe water depletion. I fear China not because of its competition, but because of its vulnerability and possible effect on an upcoming economic crisis.

Carl M Birkelbach

Carl does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Carl, his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information.