This column originally appeared on Real Money Pro on March 4.
NEW YORK (Real Money
China's policy moves
and soft economic data
have put a damper on markets worldwide.
Reflecting the policy goings-on in China and the weakening growth signals, China's Shanghai Composite
plunged by 3.7% overnight.
First, China is tightening
on its property markets. China's State Council has imposed a personal income tax of 20% on profits from home sales. (Previously, home sellers had a choice to pay a 20% tax on the profit from property they sold or a 1% to 3% tax on the selling price, for which most sellers opted.)
Second, China's economic growth continues to show further signs of decelerating. The February China Non-Manufacturing Index was 54.5 vs. 56.2 in January. Though still in expansion, the current reading is the lowest since September 2012. The February Manufacturing Index was also weaker than expected, and, joined with the February decline in the service sector index, the data clearly suggest some moderation in China's economic growth after an eight-month acceleration that began in the summer.
The bulls see win/win: If China's economy weakens, fiscal and monetary policies can be used; if the economy strengthens, then all is fine in China.
Regardless of view, the message of the weakening Chinese bourses over the past two months seems to be crystal clear -- the Shanghai Composite is flat year-to-date -- that the region's growth is rolling over. And more generally, it does appear that global GDP growth has begun to slow somewhat.
The bulls seem to be of the view that China's slowing does not portend recession either in the U.S. or globally, as none of the excesses that typically precede a recession/economic stress (e.g., expanding inventory, rising inflation and inflationary expectations, an inverted yield curve, rising jobless claims and unemployment, etc.) are currently present domestically or in the global data. As such, bulls see the (monetary policy added) global economic expansion as self-sustaining, serving as a tailwind to stock prices and valuations.
The bears see it as different this time, as excessive global easing (for as far as the eye can see) underscores a structurally weak recovery (vulnerable to innumerable shocks), with deleveraging continuing and with more profound structural economic weakness facing the U.S., the peripheral EU countries and other areas of the world. They (read: the bears, such as myself) ask why investors should be/are willing to pay an average (five-decade) multiple of 15x given the above conditions.