China: Soft vs. Hard Landing

NEW YORK (TheStreet) -- If you read my article in late April on China, you know that I am bearish on China contrary to the majority of analysts. I have one advantage: no conflict of interest. I don't manage money, I am not a broker, and don't work for Wall Street. Thus, I can say "sell" or "sell short."

The next 12 months may be the most important for investors and traders in several years. Most money managers are not prepared for it, just as they were totally unprepared during the last global crisis. This opens up great opportunities for the small segment of investors who are prepared.

I have been using sophisticated technical analysis, combined with serious credit markets analysis, to determine major trend changes in the markets for 35 years. No investment discipline is perfect, but this is what has worked best for me over the long term. It is lonely to call a major downturn when everyone else is bullish, as it was in October 2007. In fact, during the bull markets there are lots of invitations from the media. When I turn bearish, the invitations dry up. Strange. But the bulls continue to cheer on.

China is currently one of the overhyped markets. You can probably count the number of bears on one hand. Yet, it is one of two areas that will have serious problems, and cause devastating losses for the bulls, not just for investors in China stocks, but all the firms that have been selling to China. And that is a big universe.

The China housing crash is finally getting some attention in the media, but the analysts tell us that it's nothing to worry about. Ben Bernanke told us that in January 2008 about the subprime mortgage crisis. We know how that one turned out.

Last summer, when I produced the special report, The Coming China Crisis, the bulls denied that the China economy was weakening. Now the debate has changed to "soft landing versus hard landing." At least they admit there will be a "landing." If "soft" means in quick sand and mud, they may be correct.

Actually the bulls now argue that the economic weakness is bullish for the China stock market because now the Bank of China will inject liquidity and the economy will recover again. That is a common fallacy in the first part of every recession.

In the U.S., we now hear that weak oil prices are bullish, that the record low prices of U.S. Treasury bonds are bullish, that the Fed will come out with QE3, etc. But all of these are signs of a rapidly deteriorating, global environment. We heard all that in 2007-2008, but these theories did nothing to support the markets, or the economy.

You see, declining oil prices signal a very weak economy. It is the "effect," not the "cause." Lower interest rates are produced by grave concerns at the Fed, not because the Fed wants to be nice. Of course, today the situation is that short term interest rates are basically zero, and those on Treasury bonds are at record, historic lows. That by itself signals that a grave crisis is in the works and that the big, smart money is going to safety. Last year's severe plunge from May to October was just a practice run.

Trouble Ahead: China Is in a Recession >>

For China now we hear that "the government will cut bank reserve requirement, allowing banks to make substantially more loans." These analysts don't realize that the government is far behind the power curve, meaning that the economy and financial condition of most firms is so bad that they can't get bank loans at any price.

The bulls say that there are 1.4 billion consumers who will support the economy. Well, China had that many in 2008 but it didn't prevent the crash of the Shanghai market of 71%. Most of those 1.4 billion people are so poor they have trouble feeding themselves.

The bulls say that China has $5 trillion of reserves which it can throw into the economy. They don't realize that most of that money is already spent in infrastructure, and $800 million is in U.S. Treasuries, which it really can't sell quickly. By the way, in 2008, China had about $3 trillion of reserves but it didn't prevent the China crisis that year.

Bloomberg reports that China's largest real estate developer, Vanke, said April sales fell a huge 35% from the prior month. That's incredible because March was already down 30% to 50% depending on the city.

A Hong Kong-based property analyst at Credit Suisse was quoted: "It (China real estate) may pick up in the coming months, because developers are cutting prices to boost sales volume."

You see, they really think that lower prices lead to higher sales. The U.S. experience in the past four years shows otherwise. Demand leads prices. And demand has disappeared.

I suggest you don't let the Facebook (FB) hoopla lure you in.