After bouncing toward the end of last week, global stocks have resumed their downward trend.
Your current positions in your Global Stock Investor portfolio are defensive — with your bet against the euro through the UltraShort Euro ProShares (EUO) continuing to perform strongly.
That’s the only position — among any global asset class, anywhere — that benefits from the contagion coming from Europe. All other asset classes — with the exception of gold, perhaps — are no-go zones.
I’m particularly worried about one canary in the coal mine — and that is the news concerning real estate coming out of China. As indicated by the title of a recent presentation I did at the Las Vegas Money Show, “The Myth of China’s Miracle,” which you can download from my blog, NickVardy.com, I have been long skeptical of the sustainability of China’s economic expansion. With sales of Beijing and Shanghai apartments down by 70% last month — and prices down by as much as 30% — it looks like the Chinese real estate bubble has finally popped.
Given that this expansion was financed by now over-leveraged Chinese banks, this is seriously bad news for all four Chinese banks that are now among the world’s ten largest as measured by market capitalization. One Chinese commentator suggested in yesterday’s Financial Times that the collapse of the Chinese real estate bubble will have much greater negative impact on China than the collapse of the U.S. housing market did on the U.S. economy. Why? A back of the envelope calculation shows that real estate prices in China would have to drop only 30% for the major banks to be insolvent. And that seems to have already happened in a single month in Beijing.
That’s lousy news for all of us. Just think what the negative news out of Europe has meant for global stocks. Now throw in a collapse of the Chinese economy, and it’s bad news all around.
Thanks to a wide range of exchange-traded funds (ETFs) in currencies, commodities and short strategies in stocks, there are ways to profit from any sustained downturn. Recall that Global Stock Investor did the same in the months following the collapse of Lehman Brothers in September of 2008. But as the European and now-Chinese economies continue to unravel, look for more bearish bets in the months ahead.
Portfolio Update
The WisdomTree Dreyfus Chinese Yuan Fund (CYB) has been deteriorating perceptibly over the past couple of weeks, even as the actual exchange rate between the U.S. dollar and the Chinese yuan has remained constant. That indicates that certain investors are getting nervous about the status of the yuan. I am moving this to a HOLD.
iShares MSCI Malaysia Index (EWM) rose 2.96% as Asian markets recovered slightly. As one of the strongest relative performers among emerging markets in 2010, EWM remains a BUY.
UltraShort Euro ProShares (EUO) rose 1.46% during the past week as the euro hit another yearly low against the U.S dollar. Your bet against the euro remains a BUY.
P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.
