Yes Virginia...It's a Bubble...

[lsa420]

Re: Yes Virginia...It's a Bubble...

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore. terminology aside, however, it does look like china has a growth and property bubble. faber and rogers may be right in the longer term, but the intermediate future looks fraught. but then do commodity prices go down? i would think so, but i also think that would be the last, best buying opportunity for the longer term. otoh, i am not so persuaded of a deflationary china crash to sell my current commodity holdings. are you?

I completely agree with you, jk. I do think commodities will get "hit", but if they do great as that will present a nice opportunity to get into oil, et al on the cheap. I'm not getting rid of any commodity related assets, regardless of what I think might happen in China.

In the meantime, my FXI puts (I have August 2010 and Jan 2011 strikes) will hedge any decline in commodities. We'll see how that works out.

[HisHighnessDog]

Re: Yes Virginia...It's a Bubble...

How would the contributors to this topic recommend "playing" the China Real Estate Bubble Collapse thesis?

I'm pretty much sold on the thesis, but havn't much of a clue as to how to make money off of it.

I completely agree with you, jk. I do think commodities will get "hit", but if they do great as that will present a nice opportunity to get into oil, et al on the cheap. I'm not getting rid of any commodity related assets, regardless of what I think might happen in China.

In the meantime, my FXI puts (I have August 2010 and Jan 2011 strikes) will hedge any decline in commodities. We'll see how that works out.

[Southernguy]

Re: Yes Virginia...It's a Bubble...

I have not the faintest idea on how to benefit from such a dramatic outcome as a China´s bubble bursting.
FASTEN YOUR SEAT BELTS LADIES AND GENTLEMEN
Some crazy ideas....keep gold....and old 100 dollar bills stacked in some secure place.
Old dry gunpowder theory probably the best and simplest solution.
When commodities, and mainly agricultural land are on sale, go and buy.
The rest, puts, futures, derivatives of all sorts, too complicated, for myself.
In any case, if you´re not a bread earning worker.......big if, of course, interesting times ahead.
Because China shall come on top of PIIGS bust.
And, of course, on top of deepening USA bust.

[Sharky]

Re: Yes Virginia...It's a Bubble...

Reading the above jk, I start to wonder if this may cause an increase in chinese offshore property investment - i.e. buying houses in the US (particularly California, cities with good universities so wealthy Chinese can send their kids to school, and they'll be investing in a place for them to stay)

I think this is already happening (and has been for some time).

It's driven by the weak yuan, through a form of arbitrage. A typical scenario might go like this:

1. Take an unsecured loan in USD
2. Use the money to buy a US-based asset of some kind (real estate, stocks, bonds, etc)
3. Wait for the yuan to appreciate against the dollar
4. Pay off the USD loan by selling yuan that is now worth more, thereby reducing their cost of borrowing

If China collapses and the expectations of an eventual stronger yuan collapse too, there could be a significant negative impact on USD-denominated assets as the above type of investing is curtailed or reversed.

[GRG55]

Re: Yes Virginia...It's a Bubble...

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore. terminology aside, however, it does look like china has a growth and property bubble. faber and rogers may be right in the longer term, but the intermediate future looks fraught. but then do commodity prices go down? i would think so, but i also think that would be the last, best buying opportunity for the longer term. otoh, i am not so persuaded of a deflationary china crash to sell my current commodity holdings. are you?

No. But I am keeping plenty of dry powder ready to start adding in anticipation for the coming inflation as the decade unfolds...

[GRG55]

Re: Yes Virginia...It's a Bubble...

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore...

Agreed that "black swan" is now almost as overused as "bubble"...nevertheless I think this will be another widely predicted "surprise". I am disturbed by how the reports coming out of China regarding property sound so much like the rationalizations about Dubai in the last couple of years before it finally "surprised" so many and blew up.

That Dubai was an accident waiting to happen was also widely predicted, and a long held view of many non-financial lay observers including myself. Nevertheless, when the artifice finally collapsed it still seems to have taken all manner of local and foreign banks by "surprise", given the very elevated levels of stress I noted in the Gulf [GCC] financial system when there a couple of weeks ago. I have no doubt the same thing - a "surprise" - is going to happen when China finally pops.

It's almost as though the financial system is unwilling, or unable, [would be interested in your views as to which it is] to make any material adjustments to its exposure in these obviously pending bubble collapses...until they happen.

[WDCRob]

Re: Yes Virginia...It's a Bubble...

It's almost as though the financial system is unwilling, or unable, [would be interested in your views as to which it is] to make any material adjustments to its exposure in these obviously pending bubble collapses...until they happen.

The comment that if you're in the financial industry you have no choice but to play musical chairs until the music stops comes to mind.

[GRG55]

Re: Yes Virginia...It's a Bubble...

The comment that if you're in the financial industry you have no choice but to play musical chairs until the music stops comes to mind.

Yes...Chuck Prince's "we're still dancing" comment mere moments before it all came crashing down.

Is the system really so bastardized that the penalties for trying to avoid the inevitable problems exceed the consequences of riding over the cliff? Or are the personal rewards for banking insiders just so, so lucrative that it doesn't matter, and who's going to discipline them anyway...certainly the bank shareholders haven't learned a damn thing...just look at the idiotic statements coming from long-time [and long suffering] Citi shareholder Prince Alwaleed.

[jpatter666]

Re: Yes Virginia...It's a Bubble...

Yes...Chuck Prince's "we're still dancing" comment mere moments before it all came crashing down.

Is the system really so bastardized that the penalties for trying to avoid the inevitable problems exceed the consequences of riding over the cliff? Or are the personal rewards for banking insiders just so, so lucrative that it doesn't matter, and who's going to discipline them anyway...certainly the bank shareholders haven't learned a damn thing...just look at the idiotic statements coming from long-time [and long suffering] Citi shareholder Prince Alwaleed.

Certainly that's the view espoused in Buffett's last newsletter -- the bankers have way too much carrot and not enough stick.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Certainly that's the view espoused in Buffett's last newsletter -- the bankers have way too much carrot and not enough stick.

For all the flack that Buffett has [legitimately] taken recently, I have to agree with you...that part of Berkshire's letter to shareholders is worth highlighting.

[jk]

Re: Yes Virginia...It's a Bubble...

the problem is the difficulty of timing the bubble's explosion combined with career risk or business risk. jeremy grantham has addressed this explicitly in his letters on occasion. everyone knows bubbles go farther and longer than bubble-identifiers expect. in the meantime, sitting it out or - god forbid- shorting it, risks underperformance. you get fired or you lose business. if chuck prince refused to keep dancing, the board would have fired him and replaced him with someone who could deliver more "performance." managers, like grantham, who refuse to play lose customers who take their accounts elsewhere- after all, who wants to pay management fees to stay in cash?

this represents a huge advantage for the perspicacious and patient individual investor. no one can fire you from managing your own assets. and only you can decide to replace yourself with a less patient, and less insightful manager.

[GRG55]

Re: Yes Virginia...It's a Bubble...

China Regulator Said to Seek to Curb Third Mortgages

Feb. 2 (Bloomberg) -- China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans, a person with knowledge of the matter said.

The China Banking Regulatory Commission warned lenders of the risks associated with “hot money” flowing into the property market, the person said, requesting anonymity because the agency hasn’t published the measures. Mortgage defaults in China are rising, the person said without giving figures...

...Lenders extended 952 billion yuan ($139 billion) of home loans in the first nine months of 2009, a fourfold increase from a year earlier, according to the People’s Bank of China.
The PBOC doesn’t break out second or third mortgages.

The CBRC also said capital flows into Chinese assets have increased “noticeably” as investors engaged in so-called carry trades, according to the person. A carry trade involves borrowing in a country with low interest rates, converting the money into a currency where borrowing costs are higher, and lending the funds at a higher rate.

Almost 40 percent of buyers of luxury residential properties worth more than 10 million yuan last year in Shanghai were from overseas, the person said. The CBRC found one case where 38 foreign citizens who never entered China managed to take out mortgages from a bank in Shanghai through their agents and lawyers, without providing necessary documentation, according to the person.

From the "Where There's Smoke, There's FIRE" file...

Wen Warns of Bank Risks, Pledges Property Crackdown

March 5 (Bloomberg) -- Premier Wen Jiabao warned of “latent risk” in China’s banks and pledged to crack down on property speculation as the government faces the consequences of flooding the economy with money to drive growth.

“The domestic economy still faces some prominent problems,” Wen, 67, said in a speech in Beijing to the National People’s Congress, similar to the U.S. State of the Union address. He also cited excess capacity in manufacturing and weak support for rural-income growth.

Wen’s comments reinforce concern that banks made loans during the record 9.59 trillion yuan ($1.4 trillion) credit boom that are in danger of going bad...

Bad loans. Imagine that...:rolleyes:

...Wen indicated no roll-back in the fiscal stimulus that spurred a rebound, targeting a budget deficit of 1.05 trillion yuan ($153 billion), or 2.8 percent of gross domestic product, similar to last year’s ratio. The projected deficit includes 200 billion yuan of local-government bonds.

Wen affirmed a goal of 8 percent growth this year, the same target that has been exceeded for the past five years, and said China aims for 3 percent inflation and a “basically stable” currency. The premier reaffirmed a moderately loose monetary policy and a proactive fiscal stance.

The government “must not interpret the economic turnaround as a fundamental improvement in the economic situation,” Wen said.

Wen reiterated pledges that the government would restrain speculation in the housing market and curb land hoarding and excessive price gains in some cities, using tools including tax and credit policies...

That's Mandarin for "I love the smell of monetary napalm..."

...“Latent risks in the banking and public finance sectors are increasing,” the premier said...

Sounds like "Subprime is contained...with Chinese characteristics"...;)

[GRG55]

In Search of Goldilocks...

From the "Where There's Smoke, There's FIRE" file...

Wen Warns of Bank Risks, Pledges Property Crackdown

March 5 (Bloomberg) -- Premier Wen Jiabao warned of “latent risk” in China’s banks and pledged to crack down on property speculation as the government faces the consequences of flooding the economy with money to drive growth.

“The domestic economy still faces some prominent problems,” Wen, 67, said in a speech in Beijing to the National People’s Congress, similar to the U.S. State of the Union address. He also cited excess capacity in manufacturing and weak support for rural-income growth.

Wen’s comments reinforce concern that banks made loans during the record 9.59 trillion yuan ($1.4 trillion) credit boom that are in danger of going bad...

In search of the ever elusive Goldilocks economy...not too hot, not too cold...

The monetary and fiscal juggling act going on in China is getting progressively more difficult.

China’s Wen May Struggle to Meet 3% Inflation Target

March 6 (Bloomberg) -- Premier Wen Jiabao may struggle to keep inflation at his 2010 target of about 3 percent, after banks flooded the Chinese financial system with money to drive the nation’s economic rebound.

Inflation may peak at 4.4 percent during the year, according to the median forecast of 14 economists surveyed after Wen gave the goal in a speech to lawmakers in Beijing yesterday.

“Three percent is a fairly aggressive target and it suggests that the government will need interest-rate increases and price controls to achieve it,” said Ma Jun, a Hong Kong- based chief China economist at Deutsche Bank AG.

China will need to raise benchmark interest rates as early as this month to curb inflation expectations and prevent the interest on bank deposits being outstripped by price gains, according to Standard Chartered Bank...

...A reporter at a press briefing in Beijing today asked central bank Governor Zhou Xiaochuan what tightening measures would be used to meet the inflation target. Zhou said it was very difficult to forecast economic indicators at the start of the year and monetary policies would need “dynamic adjustment.”

“Premier Wen’s report has also specially stressed the need to keep policy flexible,” Zhou said. The central banker also said China needed to be “very cautious” in timing its exit from special policies...

...The premier indicated no roll-back in the fiscal stimulus that spurred a rebound, targeting a budget deficit of 1.05 trillion yuan, or 2.8 percent of gross domestic product, to help sustain economic recovery. The ratio is similar to last year’s, according to the Ministry of Finance, with the projected deficit including 200 billion yuan of local-government bonds...

Days of "special" yuan policy numbered-China c.banker

BEIJING, March 6 (Reuters) - China flagged on Saturday it will let the yuan resume its rise at some point as it unwinds the super-loose policies it has been pursuing to prop up the world's third-largest economy...

..."Practice has shown that these policies have been positive, contributing to the recovery of both our country's economy and the global economy," Zhou told a news conference.

But he added: "The problem of how to exit from these policies arises sooner or later."

China would have to be careful in withdrawing the extraordinary stimulus it has provided since late 2008.

"If we are to exit from these irregular policies and return to ordinary economic policies, we must be extremely prudent about our choice of timing...

************************************************** ************************************************** ***********************

"Hello Ben...Wen here..."

"Doin' fine, thank you. How's the weather in D.C.?"

"Yah, it's pretty good here too. Just this morning my wife commented that ever since you Americans stopped buying stuff, and wiped out half our manufacturing base, the air in Beijing is much better"

"I agree, that Greek thing really is a tragedy. But it took the attention off us for a change, eh..."

"We'd love to help, but I'm not sure there's much we can really do for them Ben; we have a strict no interference policy when it comes to the affairs of other nations, as you know. However, we did make an all cash offer to buy Santorini from them...it would make a great naval base don't you think."

"Listen, the reason I'm calling is about this Exit Strategy thing. It's suddenly become the hot topic on the cocktail party circuit over here, and I need your advice on how to handle it without actually doing anything. That wealth creation system that you and Greenspan cooked up is working wonders over here, and we certainly don't want to mess it up."

"Okay, so I shouldn't be afraid of talking up the phrase 'exit strategy' every chance I get...so everyone thinks we have a plan..."

"But at the same time you think I should sprinkle the conversatiion with lots of explicit cautions about a 'fragile recovery'...to maintain cover for the helicopter dump?"

"And never let anybody ever pin me down on the timing of any 'exit strategy'..."

"Publicly urging the banks to exercise prudent lending sounds like a great way to divert attention and change the subject. Our journalists aren't any smarter than yours, that's for sure."

"Thanks Ben. Always informative whenever we talk. See you at the G20 in June. Oh, tell the Canadians we're happy they've come to their senses and plan to hold this one in Toronto...that seal meat and dog sled thing was a bit much."

"Our love to Anna and the kids..."

[GRG55]

Re: In Search of Goldilocks...

In search of the ever elusive Goldilocks economy...not too hot, not too cold...

The monetary and fiscal juggling act going on in China is getting progressively more difficult...

China to Nullify Financing Guarantees by Local Governments

March 8 (Bloomberg) -- China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”...

That last part sounds familiar...:rolleyes:

[friendly_jacek]

Re: Yes Virginia...It's a Bubble...

No wonder that Marc Faber and other gurus are calling China's economy a fraud.
If this thing bursts, there will be some deflation (OK, we can call it disinflation) before more inflation.