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When Bert Dohmen
talks, smart investors listen.
In 2007 when most investment analysts
and economists were downplaying the developing credit market troubles, Bert
warned investors that the probability was very high that the troubles would
escalate into full-blown crisis and would produce a crash of historic
proportions. He chronicled the developing credit crisis in the pages of his
newsletter and also published a book in early 2012 entitled, The Coming China Crisis, which
provided his insightful views on the emerging crisis in depth.
Dohmen writes the
widely read Wellington Letter and China Boom-Bust Analyst investment
advisories. His Wellington Letter
has provided top-notch forecast and analysis of U.S. and global financial and
economic trends since January 1977. His newsletter has received many #1
ratings by the top ratings services and has forecasted every bear market
using sophisticated technical analysis. Bert also frequently appears as a
guest on financial television, including CNN’s Moneyline,
CNBC and FOX News. Over the last 30 years he has been a favorite speaker at
the largest investment conferences.
On December 18, I spoke with Bert
concerning his forecast of the coming China crisis, the global economy, the
U.S. “fiscal cliff” and the likelihood of another worldwide
financial crisis. Following is a transcript of that interview.
Q: You just
returned from a trip to China. What can you tell us about it?
Dohmen: I learned
something that just confirmed what I already knew. You can learn a lot more
from a country from your desk using the Internet than you can visiting a country and being wined and dined. I spoke with
hedge fund managers, institutional investors, heads of corporations, etc. The
first story they give you is that ‘everything is wonderful in
China’ and that the country is only experiencing a short-term lull with
the economy. But when they find out you know more, they open up and give you
the true story: ‘We’re stagnating, the economy is weakening,
etc.’
Q: In your
book, The Coming China Crisis, you
mentioned that your work strongly indicates China is now going through what
the U.S. did in 2007-2008.
Dohmen: Yes they
are, but it will be a different kind of crisis because China’s
institutions are different. What we experienced was a financial crisis where
institutions went out of business or had to be bailed out. The repercussions
were actually a downturn in the U.S. economy. In my opinion, the next crisis
will be an economic crisis for the U.S. and globally where all the stimulus
that has been put into system is wearing off and has less and less effect in
helping the economy. I see signs that it’s being counterproductive.
Q: Please
elaborate.
Dohmen: The
Fed’s monetary policy is destructive if you look behind the scenes. It
gives the central banks no way out. The Chinese government is doing everything
it can to keep its banks afloat. For instance, the banks in China have 21
trillion dollars worth of loans. That’s a
huge amount considering there are only 3 trillion in China’s reserves.
It’s estimated by accounting firms that bad loans on banks’ books
is as much as 40-50 percent of total loans. That’s 10 trillion in bad
loans on the books total and it’s unsustainable. This could cause a
huge crisis.
The Chinese government may not be able
to continue these bailouts eventually. In the future that will be the
limiting factor. Emerging markets like China have always been a problem when
money starts flowing out. Foreign capital flows out and then the problems
begin. We saw this late last year and earlier this year and discussed it in
our China Boom-Bust Analyst
newsletter. Foreign direct investment has since gone from largely positive to
negative. Money is flowing out of China. For emerging markets that’s
always the first big warning sign of an approaching crisis.
China has more foreign currency reserves
than others; it will delay the problem but not cancel out an eventual crisis.
When China goes into severe contraction, the world economy will suffer.
Q: Chinese
industrial demand obviously influences the price levels of major commodities.
Where do you see commodity prices headed in 2013?
Dohmen: Raw
material prices will be on the weak side. China will start new stimuli for
various sectors. But they can only build infrastructure that use raw
materials and they don’t use enough of it. They have huge stockpiles of
copper and steel and are still producing but unable to sell it. Many larger
cities have populations of more than 1 million people. These cities have
steel mills and are large employers. Governments of these cities hesitate to
shut down because they don’t want unemployment, so they keep producing.
When you’re analyzing China don’t look at production numbers, look at sales
numbers which are much harder to get. There’s a big difference between
steel production and steel sales. For instance, a big headline a few months
ago was that car sales hit new records in the U.S. But the fine print is that
these sales are by manufacturers which stuff the cars into retail channel and
sell to auto shops. The retailers were screaming, ‘Stop sending us
these cars, we can’t unload them!’ It’s called channel
stuffing in the U.S. and they do it in other countries, too. These are the
numbers you see reported, not the actual numbers.
Q: Can China
become truly great under its present Communist regime?
Dohmen: A
year-and-a-half ago we wrote that the Great Leap Forward had hit the Great
Wall of Communism. For China the easy stuff is over, such as low labor rates
and wages. They were able to get all this wonderful Western technology free
of charge. The Western multinationals all signed over the details of their
patents to their Chinese partners. That’s gone now. China got about 100
years of development in the West for free.
Now there’s a point in the
lifecycle of any country where entrepreneurs would be taking over and helping
develop, but in China they don’t have freedom. In China you see it
every step of the way; everything is controlled by the government. Unless
China finds someone like Gorbachev to dismantle the Communist regime, China
will languish and its growth will decelerate. The private sector is over
there is already in recession. The GDP numbers which they advertise at 7
percent is totally phony. The government says people shouldn’t use it
as being accurate, but as a ‘guideline’ [laughs]. It’s being
overstated and the numbers are unreliable. To measure what’s really
happening we use private sector numbers like electrical consumption, which
has declined for 1 ½ years. How can this be if China’s economy
is growing?
Q: How big is
the real estate bubble in China and has it burst?
Dohmen: Yes. People
are still talking about Beijing apartment prices being sky high, but the rest
of country has had big declines. Development companies have been selling
units and dropping prices 30-50 percent. This makes prior buyers angry and
they want to cancel sales. There are no land sales in China because only
government can own land. They’re 50 year leases, long-term leases.
Recently there have been very big new leases at record rates. These are also
phony. Companies take lands and lease to developers, which gives them 50%
revenues to run hospitals, fire departments and other municipal services. In
the real estate plunge last year developers weren’t buying anymore and
municipalities lack of income. So they make deals with developers. The lease
rates has to be at new highs so people get enthused and think real estate is
rising. It’s another form of market manipulation.
Q: On page
119 of your book you noted that the growth rate in China’s money supply
had declined from a hefty 30% annual rate of growth to around 12.5% in late
2011. What does China’s current money supply growth rate look like?
Dohmen: I
don’t have the numbers in front of me right now but it continues to
decline, money velocity is declining. Everything is ratcheting down. The only
entities getting bank loans are State Owned Enterprises (SOEs). The
‘princelings’ in China are the children of high party officials,
and it’s only they who get the loans. It’s total corruption.
Small entrepreneurs have a difficult time competing with larger companies and
can’t get these favorable bank loans or any loans. When they start
encroaching on SOE territory, the SOEs have a way of getting them out of
business. Credit lines get cut. They’re better connected and can
eliminate competition easily. You can’t have a growing economy with
this going on.
Q: Recently
there have been signs of a Chinese economic rebound. Do you see this as being
a temporary “dead cat bounce” or can this reversal be sustained?
Dohmen: The head of
the Communist Party Congress will manipulate a bounce with statistics, as we
said last month in our Wellington
Letter. When you compile the numbers you can make the economy do whatever
you want. The real economy doesn’t respond to that, however. In March
2013 China will have a new 5-year plan. Until then things will look rosier,
then reality will hit. You just have to look at free market numbers like
freight indices. The Baltic Dry Freight Index is a good one to look at. That
is now scraping at the bottom of 2008 crisis. In 2008 that index collapsed 93
percent. Freight rates dropped by that much. You could rent a large 1,000
foot carrier at that time for the same cost of a 35-foot boat on Lake Tahoe
in 2008! When goods aren’t being shipped they’re not being used.
Freight rates are a much better indicator than GDP numbers.
Q: If China
goes into a major recession, what effects will this have on the U.S.?
Dohmen: This will
be like a tsunami going through the economies of the globe. China has been
the big locomotive for the world economy. China’s stimulus was four
times the size per GDP than that of the U.S. They were four times as
aggressive as the U.S. Fed in stimulating their economy. This caused a
commodities rebound, stock market rebound, etc. Australia was also affected
by China’s demand for commodities.
Looking forward, I can’t
understand where any good news is going to come from. We have our analysis
and scenarios we go through and every day we review everything and ask if
anything has changed that would make us wrong in our predicdtions
or confirm our analysis. Today we found out that China has cancelled a 300
ton soybeans order from the U.S. What does it mean? Does China have too many
soybeans? Are the Chinese people not hungry? Are prices too high?
Another factor is that we have some
proverbial ‘canaries in the mine’ in that China is trying to
conserve foreign currency outflows. When China buys goods from West they pay
in foreign currency, not renminbi. Are they
starting to conserve foreign currencies because they’re being depleted
of all that’s leaving the country? We’re seeing cancellations and
reductions in China left and right. One of our clients sells high grade
seafood to China. He told us recently that a big order from a major client from
China was cancelled because they couldn’t get dollars, foreign
currency, from their bank.
So when demand from China goes down it effects the global economy. You don’t see this in
the daily newspapers or on TV. You don’t get this information from a
visit to China, either. The China bulls are always touting the fact that
China has 1.3 billon people and those numbers will supposedly translate into
obscene riches. But the number of people doesn’t necessarily mean the
country in question will have a beautiful economy.
Q: Before we
go I have to ask you the question of the hour. What are your views on the
U.S. “fiscal cliff”?
Dohmen: In our Wellington Letter for December we
discussed that. Nobody knows if there’s going to be an agreement among
the Democrats and Republicans. The popular view is that there will be a
compromise by year end. But as you know, the popular view is usually wrong. I
can see a situation where there’s a lot to be gained by Democrats by
letting the country go over the cliff and then blaming the Republicans.
‘The Republicans made us do it’ will be the excuse.
I just don’t see why so many
analysts are bullish on 2013. Companies are going to be hit by huge new costs
for employees. There have already been huge price increases for restaurants,
etc., with prices up 20-30% in the last six months. I think we’ll
continue to see inflation in supermarket prices and deflation in good we can
do without, durable goods. For instance I’ve noted that Costco has made
price increases of 25 to 35 percent recently. How will the Federal Reserve
deal with this? A trillion dollars next year they’ll put into the
system. It’s nothing to them. This new stimulus, how are they ever
going to exit this policy of zero percent interest rates? Someday the market
will put an end to that and paper money will become worthless and the market
will know it.
Right now we have 80 to 90 percent of
Treasury securities purchases being conducted by Fed through their stimulus.
When the Treasury finances all their expenditures with freshly printed money,
you can see in history how this will end. There will be no happy ending to
this. Can you imagine when you see real inflation rising, could be 10% or
higher, what will people say? Finally they’ll have to stop inflation.
When there’s the smallest sign that the Fed is reversing course
you’ll see a collapse in financial markets. Whenever it comes, be it
next year, 5 years or more; it’s coming.
Clif Droke
2014: America’s Date With Destiny
Take a journey into the future with me as we
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– and following – the 120-year cycle bottom in late 2014.
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The new book explains that the credit crisis
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basis for my prediction continue true to form – namely the long-term
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