Kass: Topping Out

NEW YORK (Real Money) -- The thrust of yesterday's lengthy missive was that the economic fundamentals and corporate profit outlook combined with political and geopolitical uncertainties suggest that the U.S. stock market might be in the process of making a meaningful top for the year.

In the face of a steady march of higher stock prices, investors seem to be (to a large degree) whistling past the graveyard and ignoring the weak foundations of growth domestically and abroad -- as well as other potential market headwinds.

On the latter score, slowing growth in China was one of the five near-term factors that I highlighted yesterday that should caution investors who are now chasing strength (of seven straight up weeks).

This morning, I want to briefly highlight China.

First, an interesting and concerning contribution from the lynx-eyed Stephen Roach which raises a number of issues regarding China -- most notably, the possibility of a calamitous trade war as growth pressures on China and the U.S escalate.

The United States and China are poised at the top of a very slippery slope. Creatures of two very different systems, they have much in common as they face critical tests of an increasingly contentious economic relationship. Both economies are at decisive transition points - old growth models have been taken to excess and must be replaced by rebalanced new models. Both governments are experiencing leadership changes, by different means, of course, but with equally important implications for the future.

This combination of mounting economic tensions and leadership transitions heightens the risks of a destabilizing shift in the relationship that has a nontrivial chance of sparking a trade war. In any war, there is always the saga of the itchy trigger and the first shot. With America still licking its wounds several years after the Great Crisis, there is no shortage of itchy fingers in Washington.

-- Stephen S. Roach, "A Nightmare Scenario" (Caixin Online)

Second, are the economic warnings associated with the steady downturn of the Chinese stock market (hat tip Barry Ritholtz).