China's strategy may prove naysayers wrong
Here's why China's plan to create a 'soft landing' for its economy will counteract uncertainty in Europe.
Eureka! I think I have found out what all of the bears who talk about the destruction of Greece, Spain or the euro really fear. I think they fear Chinese growth.
It seems silly, but we have to remember that there are two kinds of risks that Europe poses to the world: systemic -- think Lehman -- and growth -- think commodities. Many of the people who talk about how these risks could send the Dow ($INDU) down to 8,260 -- my disaster scenario -- may need these factors to remain front and center to keep their predictions in intact.
They ignore the budget cuts being put through and corporate assurances that business is still good in Europe. They dismiss anything that says we aren't double-dipping because of Europe.
Well, not everything. They can't dismiss China.
Just like Europe is graded by the euro and Libor and the bond spreads between Germany and the ne'er-do-wells, China's graded by the Baltic Freight Index, oil and copper. As long as those commodities are going down, the bears have no fear.
Last week when Germany put in the unilateral short-selling bans, many people -- myself included -- figured we were on the verge of a Lehman and we would know in about 48 hours whether we would see it. We didn't.
Since then, while the euro hasn't rallied, it hasn't plunged, either. That’s an indication of stasis, and the bears can't do much with stasis. I am sure at some point today the "break the euro" crowd will cause a euro-related swoon.
But the bears are struggling with China. In the last week, we have heard numerous stories out of China that can be summarized like this: the government is bifurcating the economy. It is going to allow the domestic consumption market, the service market, to grow faster and it is going to force the property sector into a serious reversal. The government will attempt to balance the growth of the consumption market with the government-induced weakness of the real estate market to produce a smooth, soft landing. Those who want the market down, those who need prices lower to complete this month's awful rout, need to get out the story that China can't do that, that it's impossible.
I think it is possible. I think it is possible because China's a command economy. There are no silly lobbyists saying they need accelerated depreciation to keep the real estate boom growing. There are no housing and property companies that own lawmakers. There are no payments for elections that make it so that houses get built and financed by the Chinese Fannie Mae (FNM). They execute the Fannie Mae types over there.
Now, I am not saying that China can trump Europe's systemic risk. That risk is real and will remain so until we see something coordinated by the central bank and the major countries that gives us a Bernanke -- by any means necessary -- quantitative ease and a pledge that Greece/Portugal/Spain either do X or they are out.
But I think that growth risk in Europe can easily be counteracted by China. One of the reasons I expect to see minerals and oil up today is that if you think that China succeeds in a soft landing, these will become buys. More important, many tech stocks that started firming yesterday are heavily linked to Asia, and an Asian reboot could help them even more.
I believe that oil can stabilize -- the Dan Dicker thesis -- and that's good for the China bulls, although I also share with Dan that oil can't power higher until BP (BP) gets its Gulf act together, and I don't have a lot of faith in Top Kill. Copper's up again and the Baltic's on fire. Australian companies are finally stopping their "woe is me, mining tax" crying and admitting that business is strong in China. That’s good for the China bulls.
At last, China's growth is knocking Europe's weakness off the front pages of traders' minds.
A horrible month is about to come to an end. We should see some stability as stock sellers dry up and buyers stop fearing the market.
At the time of publication, Cramer was long BP.
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