Watch This China Warning Flag

06/15/2012 12:02 pm EST


Vinny Catalano

President and Global Investment Strategist, Blue Marble Research

The long-term trend is way up for the Chinese market, but it’s still quite vulnerable to short-term dips, and this ETF may be able to predict imminent collapse, says Vinny Catalano.

China seems to be on everyone’s mind. Even people who aren’t invested overseas watch China to see what is going on with their investments domestically. My guest today is Vinny Catalano who is going to talk to us about what is coming here with that country.

We’re hearing a lot about China, that it may be slowing down, and when they say slowing down it’s at 6% growth instead of 8% growth. What are your thoughts going forward here?

I’ll tell you what my concern with China is. It really centers on the infrastructure building that China has been doing over the last number of years.

A lot of that is centered toward creating cities after cities, and an Australian investigative team showed one particular city that you could have seen tumbleweed rolling through the city. It’s unoccupied, buildings empty and vacant, and they just keep on cranking them out and keep on cranking them out. That can not go on indefinitely.

You know what that sounds an awful lot like? That sounds a lot like the early days of the Internet. Where they were building the infrastructure, building the infrastructure, eventually we all needed it, and eventually it was a good thing, but between then and now you had that one deep valley, and I think China is vulnerable to something like that.

Or the housing bubble that we had here in Las Vegas.

That’s exactly right, exactly. The housing bubble is another perfect example: when you’ve got overbuilding in any area—and that’s what you’ve had in China. You had significant overbuilding, you don’t have enough sufficient domestic demand, consumer demand—you have an imbalanced economy.

When you then have an imbalanced economy that also has a lot of questionable issues in terms of accounting-related items, etc., how the Central Bank is operating versus the local banks…I mean it’s really quite a bit and it’s quite significant.

If you go to another country, like I went to Brazil last year, the culture of the country really matters a whole lot. You can’t understand it from afar. You really got to go there and put boots on the ground and really, really see it. That’s why I say that some of the reports that I’ve seen in regard to China, particularly that Australian television investigative report, that was quite insightful.

And yet China can keep printing money to make this happen to continue building, so we know it is coming. How do we prepare for that? And time frame-wise, what are you thinking?

Sure. Well, again, the thing to do is be cautious about it. Be concerned, and understand that in a Black Swan environment, small things—things that seem seemingly insignificant, like in the real estate area…subprime mortgages, no big deal, just subprime mortgages—that was a manifestation of something much more significant.

Then take a look at the speed with which that came out and metastasized out through the entire system as a problem. If you see something occurring, it looks small and it looks insignificant, the thing you want to do is believe that it may be something that actually will develop very far out.

Now, if you want to follow one in the Chinese market, one that I would look at, it’s an ETF. It’s the Guggenheim China Real Estate ETF (TAO). Now, it hasn’t broken down, it’s gone kind of sideways, so it’s not in a bull market. It’s went up and now it’s been going sideways for awhile.

If that starts to break down and breaks to the downside, that can be an early warning sign from the markets that the real estate part of the Chinese economy might become very problematic going forward. That could be your early warning. You want a canary in the mine? There it is.

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