If China Blows Up, So Will Every Other Market

John Apruzzese, Chairman of the Investment Policy Committee at Evercore Wealth Management, has some very scary numbers about China’s very own QE2 that suggest a possible inflationary bubble that needs to be popped.

Total bank loans in China are $7 trillion– greater than the US economy, which is triple the size of China. In other words China’s inflation might well be “significantly higher” than the 4.4% claimed. More like the 10% inflation in Chinese food prices or more.

Apruzzese reckons that a significant risk from “continued high inflation in China will cause the country’s relative labor and production costs to increase, effectively generating the same result as an appreciating currency without the advantage of additional puchasing power for the imported natural resources.”

I say there’s just as much risky fallout from China’s “now slamming on the monetary brakes.” This is due to the ramifications of China’s slowing on the US, Europe and rest of Asia. Today, if China gets the flu it spreads to western stock markets. It used to be the other way around. It used to be that when New York got a cold, the rest of the world got pneumonia.

Apruzzese agrees that a major debacle in Chinese shares would lead to a major debacle in everyone else’s shares. You are fairly warned.

Still, China is the major committment in Evercore’s foreign stock holdings, which Apruzzese is unwilling to cut back until he can be certain trouble is ahead. It made me nervous that he thought China was 80% toward some kind of potential selloff that could be major.

Evercore’s long China through the Guggenheim Allcap China ETF(YAO), which owns the big China stocks as well as Baidu.com and TenCent Holdings which are traded in the U.S.

It also owns for clients US stocks like YUM (30% sales from China) , Nike(10% from China) and HOGS, the Chinese pork producer(Zhongpin, Inc., traded on Nasdaq.), with a large market share all pork products in China.

Evercore also has a major position in Brazil through EWZ, the Brazilian ETF, which is weighted 20% for both Petrobras, the oil giant, and Vale, the iron ore producer.

About 12% of the average portfolio is in the bonds of strong commodity producers like Canada, Australia, Norway and Brazil, where the yield is 9% in Brazilian currency.

Gold, through GLD, the ETF, is 5% of most portfolios on the basis that “All major currencies are continuing to depreciate against gold, the only form of money that cannot be conjured out of thin air. Until the Fed and other central banks start to show some control over their printing presses, gold will have much further to run.”

US equities favored by Evercore are tech giants like Cisco, and Microsoft as well as Exxon and Devon Energy.

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