Race to the Bottom

China has devalued its currency.  Countries only do this if they face significant economic challenges - excess debt, looming recession - and they want to stimulate exports to jump-start economic growth. Recently, Japan and the Euro Zone also devalued their currencies in the hopes of stimulating growth.

China's devaluation was a shock to other nations in the world, and to the world's investors.  Stock markets declined worldwide on the news, and the price of oil plunged.  The reason is simple - a Chinese devaluation strongly implies that the Chinese economy is not doing nearly as well as the Government of China would have everyone believe.  If China is stalling, everyone may soon be stalling.

Evidence that the Chinese economy is stalling has been there for all to see for at least a few months now. Copper is a bell weather for international economic health.  In 2010, Copper cost about $4.50 a pound. Today the price is about half that - $2.30 a pound.  The demand, which is driven by economic growth, simply isn't there anymore.  China used to buy about half of the Copper production on Earth.

Closer to home, the Shanghai Containerized Freight Index, which tracks the cost of moving products from Shanghai to the world, crashed as recently as two months ago.  The index was as high as 1600 in 2010. It is now below 1000, which is below where it was at its low point during the 2008-2009 recession.  The index represents how much stuff is leaving China for export to the world.  The index has plunged about 30% this year, strongly suggesting that Chinese exports have been drying up...and low and behold, we had a currency devaluation yesterday.

There are canaries...there are coal mines.  They don't mix very well.  In the move from Greed to Fear, many investors prefer to ignore all evidence of looming problems until it is to late, as Greed is a powerful force.  A Chinese devaluation strongly suggests that the Chinese economy is not growing at 7% a year as claimed by the Communist government.  In fact, a devaluation strongly suggests that the economy there is already in recession. What the world does in response to China's move may tell us what everyone else really thinks of their economic prospects as well.