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Forget Europe, This Is Worse



September 29, 2011 – Comments (0) | RELATED TICKERS: FXI , FXE , NTES

As you all know, the banking crisis in the European Union is an absolute disaster. Most of the countries in the European Union are insolvent and they will have to likely default at some point. Whether or not there is a structured default remains to be seen. At this time, the European Union is likely pass this European Financial Stability Facility (EFSF) to help bailout all of the Euro-zone banks in the near term. This plan is simply paying off debt with more debt. While it may keep the European Union together for a little while longer there are still going to be major problems in the region for a long time to come.

Believe it or not, there is a bigger problem lingering in the global economy. It is not the European debt crisis, it is not the massive U.S. debt crisis that grows every day. It is a Chinese slowdown that could cause the stock markets to decline further. The Shanghai Index (China) made a new 52 week closing low last night. China is the growth engine of the world, they produce most of the goods that people buy and use in the world. The Shanghai Index has actually lead the global stock markets for years now. If you look at the March 2009 low on the S&P 500 Index and the rest of the major stock indexes in the United States you can easily see that the Shanghai Index actually bottomed in November 2008. This is clearly indicating to us that the Shanghai Index is the leading economy in the world.

China is facing many problems at this time. The country has a housing bubble in place. Real estate prices are much too expensive compared to the average wage. Next, the Chinese economy is facing high inflation. This is obvious in Chinese housing and the cost of food for the people who live in the nation. The Chinese are also starting to face an uprising in the labor force. The Chinese workers are demanding raises and better work conditions. These are all problems that are happening right now in this massive country. People must understand that the nation has a population of 1.3 billion. Any economic slowdown will hurt that country.

This morning, the Chinese ADR's are behaving terrible. Leading stocks such as Baidu Inc. (NASDAQ:BIDU), Sina Corp (NASDAQ:SINA), and Inc. (NYSE:SOHU), and Inc. (NASDAQ:NTES) are declining sharply lower on a day when the stock markets in the United States are rallying higher. This is not the type of action that is healthy. Remember, it has been Chinese investments around the world that everyone has been hanging their hopes on. If the Chinese stop investing in different places around the world the entire global market will slowdown. This is worse than the European crisis.

Nicholas Santiago

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