The reverse China syndrome.

"The China Syndrome" was a popular movie from 1979 that centered about unsafe operation of a US based nuclear reactor which, if allowed to melt down, could burn its way through the center of the Earth and come out in China.  I have written many times in these pages that China is a massive debt Ponzi and that at some point it will implode.  When it does, the meltdown will likely burn its way through the center of the Earth and end up in the US midwest, thus the "reverse China syndrome", economic edition.

Along these lines, Mauldin is out today with part 2 of an article centering around how China is a big bubble that will certainly burst at some point.  The rapid recent rise of China into the #2 spot in global economies was largely driven by debt based overproduction.  A lot of the debt used to fund this foolish economic activity is bad debt that just keeps getting rolled over in order to avoid having to admit that it is in fact bad debt.  If you want to know where uber-cheap Chinese products really come from, it is not their super low labor costs but rather their use of debt to create unprofitable levels of manufacturing.

Part 1 of Mauldin was called Transformation or Bust.  Here is part 2 (warning, this link might change over time and if it does you will have to search for "Transformation or Bust, Part 2".  I think these articles, although a bit windy, are worth your time to read because they show just how much of a bubble the Chinese economy really is.  The reason this matters to you is simple: when they default on all that bad debt, the global money supply will contract, the global reserve currency (dollars) will get stronger, and Chinese products will have a fire sale window as unsold inventory of this overcapacity is blown out.  But more importantly, after that blow out is complete, prices are going to rise significantly in the US.  In other words, the Chines bust will be part and parcel of global credit deflation but after that the overcapacity will be gone and Chinese will no longer give away their products for less than the cost of shipping it from NY to LA.

So now is the time to think about what kinds of Chinese made products you think you will be needing for a long time.  You should be watching the prices plummet.  You should be watching for that 3rd wave down when things are so cheap that you wonder how anyone can afford to make and sell it for that kind of money.  At that time you should realize the truth: they can't.  What you will be seeing is the bust phase of a pump and dump money supply and so you should buy what you need during that price dip because when it is over, say in 2017 or so, you will never be offered those kinds of cheap prices on Chinese goods again.  Not because they won't want to, simply because their supply will have collapsed due to bad debt and the demand will remain constant.

Do not fool yourself about Chinese goods being way too cheap in the US forever.  This was only a phase, the loss leader that allowed them to grow production capacity (too) rapidly.  The best of their businesses will survive, the weak ones will BK, overall production will plummet and prices will increase dramatically at some point.  This is what will drive jobs back onshore for the next swing of the pendulum.