Jim Cramer – Balanced Thinker But Wrong On China

Editor’s Note: This
is an article that expresses our personal opinions about issues and topics discussed on Television and other media.  It is NOT intended to provide any investment advice of any type whatsoever.  No one should base any
investing decisions or conclusions based on anything written in or
inferred from this article. Investing is a serious matter and all
investment decisions that should only be taken after a detailed
discussion with your investment advisor and should be subject to your
objectives, suitability requirements and risk tolerances. .

Let us admit, perhaps to the consternation of some of our friends, that we like how Jim Cramer thinks about investing.  We watch his show regularly and find his views on markets thoughtful and useful. 

On October 6, 2008, Jim Cramer told his viewers to take money OUT of the stock market if they were likely to need it during the next 5 years. We wrote then that this was the best piece of advice rendered on CNBC in 2008 – see our article – “Investor Biases, Financial TV Coverage and Large Money Manager Agendas”www.cinemarasik.com/2008/10/11/investor-biases-cnbc-coverage-and-large-money-manager-agendas.aspx

We like Cramer’s thinking because his thinking is balanced and his own money is at risk. Many readers might argue with our adjective “balanced”. But, frankly, that is what he is. His emotional nature is worn on his sleeve and he tends to shout. Some of our women friends tell us that they cannot stand his manner and refuse to watch his show.  That, frankly, is their loss. Because, underneath the strident manner, lies a sharp, balanced and disciplined mind.

We often agree with Jim Cramer, especially about issues of transparency and ethics. In this context, we urge readers to watch his exhortation to the Regulators to use RICO (Racketeer Influenced and Corrupt Organizations) Act to pursue financial wrongdoings – www.cnbc.com/id/15840232?video=988571410&play=1

Today, we disagree with Jim Cramer on his major call for 2009.  Why is that worth an article? Because, the issue in question might prove to be the single most critical investing issue for 2009.

On Tuesday, January 6, 2009, Jim Cramer talked about the power of China’s stimulus plan – the plan that intends to put millions of unemployed Chinese to work. According to Jim Cramer, China is the engine that will pull America and the global economy out of our mess.  In his own style, Cramer asked “Could Capitalism be saved by Communist China?” You can hear Cramer’s views at www.cnbc.com/id/15840232?video=987203043&play=1

This is an important and currently popular argument. This view is reflected in the massive rally in cyclical, infrastructure and metal stocks in December and early January.

Our own views about China were expressed in our November 15 article – “Chinese Slowdown – Revenge of the Austrians?” www.cinemarasik.com/2008/11/14/china–dubai–revenge-of-the-austrians–does-the-size-of-the-stimulus-indicate-the-size-of-the-problem.aspx

Our belief is that China suffers from an enormous overcapacity problem.

  • China used the flood of money it received from America and Europe to build factories of every type and spent on infrastructure projects to employ the tens of millions of migrant workers. 
  • This has created a glut of factories and excess manufacturing capacity that would need to be shut down. According to The National Post of Canada, officials in Guangdong province expect that 20% of the region’s factories will close within the next 3 months making 2.7 million jobless on top of the 6 million jobs lost in 2008. And this is China’s most prosperous and developed province.
  • The Property and Housing Markets in China are even more bloated than those in America.
  • Chinese Banks are loaded with bad debts. These may be the worst banks in the world in terms of balance sheet damage.

Unlike America, China is NOT the master of its own destiny. The miracle of Chinese Growth and the irresistible force of the Chinese Export Machine was not due to China. It was due to the irresistible force of the American Consumer Spending and the miracle of American Trade Deficit. By mid 2007, China was getting $40 billion per month from America and Europe.

Now, Americans have begun to save and cutback on their spending. This represents real trouble for China. Without American spending on Chinese goods, China cannot grow the way it did. Domestic consumer spending in China only accounts for 1/3 of Chinese economy.  The other 2/3 is dependent on flow of foreign capital into China.

When Americans were spending and China was growing, the world’s hot money flew into China. Today, there are clear signs that this hot  money is exiting China. China’s foreign exchange pile has been shrinking since September 2007. We would not be surprised to see China lower the value of its currency despite the howls of protest from the US Congress.

So like Jim Cramer, we believe that China will represent the engine for the global economy. Unlike Cramer, we think China will pull the global economy into a deeper slowdown and a deflationary bout. So,

  • If you agree with Cramer, increase your exposure to cyclical stocks, metal stocks and emerging markets,
  • If you agree with us, increase your exposure to high quality bonds and high quality US non-cyclical stocks.

Think back to the 1999-2002 period, especially to the story of JDSU and Cisco. Companies like JDSU were high growth sellers to larger companies like Cisco. So, in the boom period, JDSU stock performance blew away the performance of Cisco stock. But when the bubble burst and companies like Cisco cut back on their buying, look what happened to the two stocks (see chart below).

During the bubble of American consumer spending, the stock performance of FXI, the Chinese ETF blew away the performance of SPY, the S&P 500 ETF.  Now that America’s spending bubble has burst and Americans have embarked on a multi-year effort to save and rebuild their personal balance sheets, the Chinese growth bubble will deflate.

In other words, five years from now, the chart of FXI-SPY will look like the JDSU-CSCO chart.

           (JDSU-CSCO – 10 year monthly chart)                                  (FXI-SPY – 5 year monthly chart)

Whether you concur with Jim Cramer or us, do focus on China. What happens to China will determine the trajectory of the global economy in 2009!

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