Wednesday, August 3, 2011

Shanghai still leads

- by New Deal democrat

With Monday's surprise steep decline in the ISM manufacturing index from 55.3 all the way down to 50.9 (right at the inflection point between expansion and contraction), it is clear that manufacturing, which had led the recovery since 2009, has stalled.

The simple fact is that US manufacturing has stalled because Asian growth is stalling. Asian central banks are raising rates and trying to reduce leverage to control widespread inflation there. Bonddad pointed out about a month ago that the yield curve in India has inverted, as a result of those efforts.

One of my central tenets for the last few years has been that leadership of the global economy has passed from the US to China. This means that the Shanghai stock market, not Wall Street, leads. If you want to know where US manufacturing activity is heading, look to where China has been.

Here is a graph showing the Shanghai stock market performance for the last 3 years (orange) compared with the S&P 500 (green):



Note that Shanghai bottomed in November 2008, not March 2009 as happened in the US. China's market peaked in mid-2009, with a secondary peak last October. The US market continued to rise but has been unable to break through its April 2011 highs so far. Shanghai is down about 15% since its peak of last October - a classic decline in an economy where money is being tightened to tame inflation. The US market is off less than 10% so far.

So long as China cools, do not expect any re-acceleration in US manufacturing growth.