The baton is being passed from Europe to China. On Europe: if everyone is bearish and knows how bad things are, then its too late. The fundamentals justify the bearishness, but the European stock prices reflect this. But China is different. I am still surprised at how many believers remain in the China story despite the stock prices being quite weak. Maybe it is because they keep growing, that has traders mesmerized. But then why aren't the share prices going up? Why is it so much weaker than US equities? I have never seen such a big disconnect between GDP growth and stock prices in a major market. When you have 9.7% GDP growth, the stock market shouldn't be so weak. It has to be the real estate bubble. The smart money is now out of China. They know that the gig is up. The dumb money is getting anxious. Property prices are falling now.
China GDP growth has been induced by a property bubble that has non-real estate companies investing in real estate. You have insane projects like high speed rail that no one can afford, empty malls, ghost cities in the middle of nowhere. It is not quality GDP growth. It is just dumb central planning. The banks are loaded up with bad loans. They will become zombie banks. This is a repeat of Japan in 1990. Chinese companies face the double whammy of growing wage pressures and a bursting real estate bubble. The profit numbers will look like a train wreck in 2012. I see a lot more similarities between China and Japan, than I do with U.S. and Japan. China has a real estate bubble based on overinvestment, just like Japan did in 1990. The US was an overconsumption story. China is an overinvestment story.
This will have ripple effects on the commodity exporters of iron and copper, and to a lesser extent crude oil. That is why Brazil and Australia have been so weak. The market usually foretells of dire situations. I see the Australia dollar getting weaker along with their stock market. Same for Brazil. I wish there was CDS on Beijing and Shanghai real estate, because I would go all in on that trade.
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How is US just an overconsumption play. We were on the brink of economic collapse.
I thought US crisis was because banks made bad investments??
China stock is weak because the locals don;t believe in their stock market. They channel all their money into property and there is a trend of over and blind investment. Their stock market is not a reflection of their economy.
Home equity loans were used to consume over income, the house was used as an ATM, building up leverage in the system. That setup the financial crisis.
In China, it is government mandated spending in property projects and overzealous real estate speculation among the rich. The amount of bad loans is enormous, most of these recent real estate projects have negative ROEs, how is that not a part of the economy.
Good points, but I believe this is the consensus opinion and expectation from most people in the West who've never actually went to China. I was in your camp for a long time, but slowly my opinion change with each passing year. I would not bet against the largest creditor nation in the world. Rest of us in serious debt.
Wrong. Price depreciation itself did not cause the financial crisis. The fact that each mortgage was cut in 100's of pieces, repackaged as collateralized debt and sold to institutions as AAA bonded securities is what caused the crisis. It was a derivatives crisis with the banks and institutions holding the bag. We had a 40% real estate value drop in 1990 but didn't experience a crisis because the mortgage derivatives market was non existent back then.
Real estate is small part of the overall chinese economy. i see more similar like the 1999 dotcom mania. That was not a systemic event. nor is this. Just people lose investment value. Definitely many speculators in china have and will get hurt on their real estate so it's Welcome to capitalism.
Debt to GDP ratio in 1990 versus 2008 is 230% versus 360%. A growth of leverage to that extent made the financial system fragile. Don't blame CDS and financial engineering. In the end, if the real estate wasn't so overpriced and the country so overleveraged, you wouldn't have had a financial crisis.
As for China having only a small part of their economy in real estate, that is false. Real estate includes residential and commercial. It is a huge part of the Chinese economy. Fixed assets investments versus GDP is enormous compared to any country in the past 30 years.
The speculative residential side of China real estate is small. Much of China GDP is infrastructure investment to move the billion people out of rural conditions into urban cities. Not sure how that is a "bubble" since it's more a necessity and the only main investor is the Chinese government whose vested interest is social planning. This is what the west and the US did during the industrial age when farmers moved to New York and Chicago and built the first transcontinental railroad. It would be a waste if there were few population. However, population is big concern in China.
Industrialization and urban planning of a nation is a social process. Ponzi's are securities and derivative sales or home flipping. These are bubbles. It seems as you are saying entire nation is a bubble and that China's economy is based on flipping homes
yes, the financial crisis has everything to do with CDO subprime, alt-A option, and now Prime. Why? Because the total loss in home values in the US to avg joe homeowners is in the billions. The losses in the financial derivatives which they were underwriting are in the hundreds of TRILLIONS, which the US and European banks and pensions got caught holding. Each 100 basis point drop in housing price was a 1000 basis point loss to the security holder leveraged 100x.
the US bailout via TARP, QE's, was a bailout of the the trillions in losses incurred by Banks. There aren't even 10% of the value in actual physical housing that the banks underwrote in securities.
China stock market is weak, but not THAT weak compared to the rest of the world. I trade the HK market and people here are more confused as to why the US market is so resilient than to why the China market is weak.
Also a thing to note is in many global markets, be it US/Japan/Germany/Oz, major I-banks dominate trading volumes with the exception of China as they are not allowed to trade there, unless they have something called a QDII, and even that only gives them limited power. Which means retail investors make up a bigger share of the China market, and I'm gonna go ahead and assume its more of a liquidity problem rather than people lacking confidence in the market.
Yes. the actual US physical residential housing value was $4 trillion at the peak. A 40% haircut would come out to 1.6 trillion in losses to the public. The public had a bigger loss in the dotcom bear market but we had nothing close to a financial crisis. It is that the mortgage derivatives market was over $200 trillion!!! wherby the derivative was leveraged off the underlying many many times. In 2008, those securities plummetted and were worth pennies on the dollar and the amazing thing is they were still AAA rated several weeks into the fall!
US markets are "resilient" because there are Quantitative Easing where the fed buys low risk assets to force down riskless rate of returns and "force" banks to buy some riskier assets.. ie dividend stocks, and then growth stocks, and then mortgages, etc etc... No coincidence the new POMO began exactly the same time the onset of October rally. S*P is pure financial engineering at this point with the hope that the tail wags the dog and jobs somehow created out of thin air cos S&P up.
I am prepare to long china stocks... Once people lose confidence in their property, they might turn to stocks to invest their excess money...
I know china and the most new housing in China last 10 year is state owned housing for manufacturing employees. They move tens of thousands of people from the farms into big factory cities powered by windmill and solar. the more expensive real estate in beijing and shanghai for the wealthy, HK investors and foreigners those are in bubble. But most new construction past decade is subsidized housing> These not built for resale or investment but to house and move labor from rural places.
US markets crash when there is no QE and Fed. Simple as that. Like what happened this past summer when they pulled the plug on QE or May 2010.... No QE no bids........ US markets just collapse when it is not propped up.
I don't think Europe problem is over, it is just beginning. When it looks bad we get short squeeze to beat up people trying to profit off it. There is no way Europe can justify the ESFS when none of the countries will grow GDP. What amazes me is how anyone expects GDP growth during austerity? Those are mutually exclusive occurences
Europe is asking China for money to buy their bonds. The only thing Europe will be passing to China is a brochure and prospectus.
Please use a name to comment so we don't have to figure out who all the anonymous are. thanks
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