“Shenzhen, we have a problem...”

Back in August, I wrote a short post sardonically titled “Welcome to the recovery,” arguing that the stock market valuations of late last summer were unsustainable given the weakness of the U.S. economic recovery. Per the usual, I was early in putting my concerns down on paper – the S&P spiked another 12% between the time of that post and the end of the year. But now, aside from the fundamental weakness of demand and lending in the U.S., there are some big global events occurring that imperil whatever recovery we have experienced to date.

First, the debacle in Europe in connection with Greek government debt poses a unique problem that could offer challenges worldwide. Given the amount of Greek debt held by banking institutions throughout Europe, a default by Greece could set off a chain reaction that puts banks under pressure due to falling asset values, a kind of death by accounting such as we saw in 2008 with the failure of U.S. commercial and investment banks.

Second, the long-awaited China crash could be closer than many think. Appearing in BusinessWeek, Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, sums things up with the problems in the Chinese real estate pretty well:

“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land – not even desirable plots of land – in Beijing to astronomical rates. At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it’s just a case of when you recognize the losses – or don’t.”

This is all starting to look very familiar.