Yardeni: China’s Stock Bubble Is Bursting

Yardeni: China’s Stock Bubble Is Bursting

Global macro expert says U.S. stocks look more attractive against world backdrop.

Reviewed by: Drew Voros
Edited by: Drew Voros

Ed Yardeni is president and founder of Yardeni Research, a global investment research strategy firm. A former economist for the Federal Reserve Bank of New York, he is widely followed by institutional investors for his investment strategy publications. Dr. Yardeni is often seen on CNBC and is published in financial publications like the Wall Street Journal, The New York Times and Barron's.

ETF.com: What’s happening with China’s stock market? Of course, we've seen a pretty long rally, so a correction isn't completely out of the ordinary. But it does seem like something is out of the ordinary here.

Ed Yardeni: China seems to have inflated a stock market bubble in record time. The People’s Bank of China started to lower interest rates again in November and that seemed to have fired up the speculative mood in China. Many Chinese have a very high savings rate. And so they need to put it somewhere.

For the past several years, Chinese investors have been putting their money into property, into real estate, buying second, third apartments that have been sitting vacant in these so-called ghost cities. But the government tried to discourage that kind of speculation, and raised the down payment requirements. And so, Chinese investors, with all this cash around, have been pouring into the stock market.

They created a huge bubble in record time that’s bursting. I don't think this is a correction; I think this is a bursting of a speculative bubble. And the fact that the government is resorting to all these desperate measures—suspending trading and prohibiting selling—just worsens the prospects for the stock market. Who's going to want to buy into a market where the government can mandate that you can't sell your position?

This is going beyond the stock market and creating a real credibility problem for the government. For many years, everyone's had confidence that the government could manage the economy and could provide the kind of programs necessary to keep the economy growing. But they're really blowing their credibility big time here with this effort to prop up the stock market, in an economy that's clearly slowing and has lots of problems, particularly excess capacity, deflation and too much pollution and corruption.

ETF.com: Is this something that could reverberate to American investors?

Yardeni: The most immediate investment implication is that China’s growth will continue to weaken, which then is already putting more downward pressure on commodity prices. So I would certainly not want to be long any commodity-related securities, whether it be gold, gold miners or copper shares. I wouldn't want to be long commodities.

It's been interesting to note that gold hasn't rallied on all the commotion in Europe and in China. And that's because gold tends to follow the trend of industrial commodity prices. And they're falling.

On the other hand, the U.S. economy is looking more and more resilient. It's likely to weather the overseas storm in Europe and in Asia. We have a very resilient, diversified economy. The U.S. consumer is in relatively good shape. Housing activity is picking up. So it may very well be time to switch back from the “Go Global” investment strategy to a “Stay Home” investment strategy.

Throughout this bull market, I’ve been promoting a “Stay Home” investment strategy, but I wavered in the beginning of the year, conceding that we couldn't have some outperformance overseas, because the U.S. is relatively overvalued relative to Europe and some other markets. But I think the fundamentals now point back to the U.S.

And all this commotion increases the odds of only one rate hike over the remainder of the year, one-and-done. But none-and-done also looks increasingly likely.

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at etf.com and ETF Report.