With all the talk of a market rally driving the S&P to post crisis highs, top trader Steve Cortes is confounded that pros are all but ignoring a very serious situation.
“China is trading at its lowest levels since the 2007 crisis and that’s a big problem for the markets,” says Steve Cortes, founder Veracruz, a research and consulting firm.
Cortes sees the weakness as a sign that China's economy is slowing far more rapidly than most investors seem to understand. And unlike the US, Beijing can’t embark on widespread easy money policies.
That’s because, unlike the US, for the average Chinese citizen, a large portion of income goes toward buying food. If Beijing stimulates the economy aggressively, they risk inflation - particularly in food prices. Read More:"Food Price Shocks— Is Asia Bracing for an ‘Acute’ Jolt?"
In the past, a rapid rise in food prices has triggered civil unrest in China's poorer regions.
Cortes argues that Beijing can't afford that kind of risk.
And he adds that an exogenous factor makes China’s situation all the more precarious. “The drought here in the UScould not have happened at a worse time,” he insists. The drought has diminished the harvest which increases prices simply due to the laws of supply and demand.
Therefore, Cortes argues that Beijing can’t embark on aggressive easing – and risk driving food prices to a point that they trigger civil unrest. Instead, Cortes believes, Beijing will opt to allow the economy to cool down.
“To my way of thinking, the market is looking might toppy,” Cortes tells us after the show. “People like to say there’s a Bernanke put in the market, but there’s nothing Bernanke can do about this.”
Cortes goes on to say, “I don’t like to pick levels, but I have no problem saying right now I can see the S&P sliding to 1300. From there, I’d have to see.”
Of course, not everyone shares Cortes' outlook. Jim Paulsen of Wells Capital Management certainly doesn't. He expects the market to trade 1500 by the end of the year.