Market Thoughts

The following post comes from an email I sent my friend Kenny. I'm too lazy to rewrite it, but it covers some of what I've been thinking about lately.

"I've been thinking about this. The market doesn't need fundamentals to rally or go up. Just look at the housing bubble or the dot.com bubble. What it does need is liquidity, monetary expansion, and credit growth.

"Bank credit contracted at a 2% annual rate last month. Who cares what the Fed does. The banks are the ones that touch the real economy, that connect the Fed with the real world.

"So I'm inclined to believe that this is another rally based on false hope. First, it's unsustainable, and second, I don't believe we'll have a V-shaped recovery. Best case scenario is a U.

"Anyway, that's my humble opinion, and I reserve the right to change it at any time. I've been wrong before and will be again. That's the only prediction I'm 100% confident in.

"Anyway, I've been thinking about China and was wondering what you think of when you put these little data bits together:

"lending in march was up 600% over march 2008
exports were down 17% yoy (year over year)
more new cars sold in China in Jan.'09 than in USA
recent copper purchases which pushed copper prices to six month high have all been stockpiled
chinese investors coming to SoCal to buy houses as investment
40,000,000 jobs lost in China last year
money supply growth of +26% for march 2009 (yoy)
commercial real estate implosion has shut down developer IPO boom
20% vacancy rate in office buildings in Beijing
yet there's conflicting data that people are borrowing to buy houses

I didn't tell Kenny (because I value his unbiased opinion), but I think there are signs of a flight into real goods in China. It looks like they may be looking at a nasty bout of severe inflation gathering steam later this year. I am going to keep a sharp eye out for possible confirmations of this, especially interest rates. The other thing I need to do is figure out how to play this. Gold is a possibility.