I hate to sound like a broken record on this subject (even though most of us don’t use records anymore), but the Chinese stock market is in a major bubble.
The real estate market has been in a massive bubble too, and for longer than I could have imagined. For that reason, I am hesitant to call for an imminent downturn in Chinese stocks, especially since it is impossible to time these events anyway. But I do foresee a major Chinese crash, whether it is in a week or a year from now.
I would be really shocked if these two bubbles both last for another two years or more. The only way I could see this happening is if the Chinese central bank pumps even more money into the system at a greater pace than it already has.
The real estate market in China has seemed to cool a bit, but nothing close to a crash yet. Meanwhile, the Chinese people have found themselves in the midst of a second bubble, whether they know it or not.
The Shanghai Composite Index just went over the 5,000 mark. For some context, the 52-week low is barely over 2,000. When a somewhat major stock market index goes up over 150% in less than a year, you know it is a bubble. You know it is unsustainable.
This isn’t a post about shorting Chinese stocks, although that is certainly a possibility. This is about the ramifications for the U.S. economy.
American consumers rely quite a bit on Chinese products, but there is more of a connection than this alone. If there is a major recession in China, it would be hard to believe that this would not have some harmful effects on the U.S. economy.
The U.S. economy has its own misallocations. U.S. stocks are likely in a bubble from the previous easy money policies of the Fed. I don’t think real estate is in a nationwide bubble in the U.S., but certain areas such as Silicon Valley in California are likely in housing bubbles.
When Chinese stocks finally go into free fall, then don’t be surprised if U.S. stocks initially follow suit. The bigger question mark is if U.S. stocks will just have a correction or a new bear market.
Watch China. It is going to get interesting.