Blame It On The Other Guy

Have you ever know someone who was so busy finding fault with others, they never bothered to see what their own problems were?

Judging by the start to the 2016 stock markets, it looks like the US market talking heads are just that person.

China lost 7% on the first trading day of 2016 and the the market had to shut down to make sure the bottom didn't fall out.

Then the contagion spread across the globe, finally ending up hammering US stock markets. And while all the headlines shrieked that China's tepid manufacturing numbers as well as Middle East turmoil were to blame, we're looking past the real culprit.

First, Chinese economic data isn't falling off a cliff. At least that's what most indicators would have us believe.

But a story out in Barron's dated January 5, 2016, and already posted online, likely has caused much of the stir in the US market, at least in the power offices on Wall St. It claims that the Chinese numbers are highly inflated and that most the Chinese economy is growing at around 4%, almost half its stated 7% GDP.

When Barron's publishes such a controversial piece, all the Street players have to react, simply to show that they read the piece and are duly impressed.

The problem is, it's an opinion. The view of the author, who is a senior economist at BNP Paribas bank is basically that the Chinese is transitioning from a developing manufacturing based economy to a more developed, diversified economy. And in that transition growth is getting hurt.

But even the article concludes it's not a death knell for China, or any of its trading partners for that matter. The problem is when these stories are released, they tend to rattle the chattering class and institutional players on the Street, whether they're valid or not. They don't really care where the markets are, because they make money when there's turmoil, not when markets are going up.

As for the Middle East turmoil argument. Please, there has been turmoil in the Middle East ever since oil was discovered there. That certainly isn't roiling markets.

The real issue under these flimsy excuses for the global market selloff is because the US economy is looking bad. As is Europe.

China's manufacturing sector is off because the US and Europe are not contracting to build things because people and companies are buying as much of those things. There's little supply when there's little demand.

We aren't hearing this narrative because the financial anchors and politicians are talking about how well the US is doing. And the most egregious example of this was when the Fed raised interest rates last month. There was very little in the US economy that supported an interest rate hike. But it's an election year, and it's downright American to be optimistic.

Inflation has been muted by low energy prices. Spending for the holidays was up but not by much. Wages are low and not expanding much.

And then there's the industrial and transportation side of the economy. No one really talks about these two massively important sectors.

The US Purchasing Managers Index (PMI, which indicates whether businesses plan on buying more goods to make more things) is down again for December. Orders hit their lowest mark since September 2009. And the equally important Institute for Supply Management (ISM) report also shows another drop in manufacturing.

Both reports indicate a slight but continued contraction (not expansion) of the US industrial sector. If companies are building more products it's because there's no demand. And if US manufacturing is getting hit, it's no surprise China is feeling it.

Add to this the the fact that the Dow Jones Transportation Index, a basket of the nation's top land, sea, rail and air carriers is off 20% in 2014 (and continuing that slide into 2016). The scary thing here is, most of the cost of transports is wrapped around fuel costs. With prices at decades lows, these companies still are losing ground.

So, the US manufacturing sector is in contraction, the transportation sector looks terrible, the industrial sector is in a full-fledged recession and the energy sector is being choked out of existence by Middle Eastern oil ministers. Oh, and the US dollar is a stratospheric levels making exports that much more difficult.

And China is the problem?

This in no time to be a hero and try to bottom fish bargains. Stay away from the markets for now. January is going to be highly volatile as all the big players now reposition for the coming year. And no one knows what to make of the coming year.

Keep your eye on the US economy and don't be led astray by the talking heads or optimistic factoids. Replacing high skilled workers with more low skilled workers isn't economic growth; it's a shell game.

Real estate, hard assets and the US dollar a good places to be right now.