Monday, June 4, 2012

Mon Post #1: China's bubble is starting to break

Patrick Wolff, founder and chief executive officer of Grandmaster Capital Management LLC, was on Bloomberg Television's "Money Moves" talking about China.

In his words, China's bubble is starting to break.

The thing that is really striking about China is that there is an extraordinary double standard in the world today. You know, what you have in China is a state dominated, really state controlled, economy. It's, you know, it's not really capitalism by any stretch; it's something different. And it's very striking to me that the same people who would probably be apoplectic at the idea of the US government tightening regulations even a little bit in some area--that I know you were talking about the Volker Rule earlier where obviously there is a lot of debate on that as their should be--but the same people who would be really really upset about that, somehow come to believe that the fact that China's government controls everything in China is a good thing. I don't think it's a good thing; I think it's a bad thing.

I think there have been years and years of debt-fueled mal-investment. And it's come to a head. And when it breaks, as it seems to be breaking now, it's a long way down.
Another reason we shouldn't expect HAM (Hot Asian Money) to flood in and support the Vancouver Housing Market.

(hat tip World Housing Bubble)


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  1. Thanks for that Whisperer. It was an excellent interview and I am certainly in agreement with many of the remarks Patrick Wolf makes.

    Yesterday I tried to lay out the survival process by which a Europe and US debt debacle was being resolved through a mutually cooperative devaluation process. Today I might touch on why the preeminence of the USD as the worlds reserve currency is not in jeopardy nor will it be in doubt in our lifetimes.

    China, ironically enough, plays a key role and demographics are at the heart of how this process will play out. The triggering mechanism though is the bursting of the property bubble and a long corrective period of adjustment that follows the vast level of malinvestment we have seen there over the past few years.

    The instability that this creates will continue to drive purchases of USD and Treasuries by foreigners and China in particular. That is important as this is one of the means by which the US government and its many programs are funded and it is the process that assures the dollar remains both in demand and a leading stable currency.

    You will probably recall it was not so long ago that some very well known pundits were calling for the end of the dollar. They were insisting a hyperinflation in America would render the currency worthless and destroy our way of life overnight.

    Boy, were they ever wrong.

    Instead we have seen the dollar surge on global uncertainty and inflation hedges like gold get crushed despite the fact there is indeed a persistently high level of inflation on this continent and elsewhere.

    China's role in backstopping the global economy during the past period of crisis is no doubt appreciated by everyone. A massive building program that demanded ever increasing amounts of raw material inputs and energy seemed destined to make China the leading nation in the world.

    All nonsense of course.

    This effort was undertaken to support a growth model that is (and was) quite frankly unsustainable over the longer term. Everyone should have understood that double digit GDP growth and constant expansion might inevitably lead to a sharp correction.

    We are seeing it in action now.

    The problem for China though is that the expected decline and the recovery period will be unusually long coming off such a high level of growth. Patrick is correct in comparing China to Japan in this respect and concluding this next slowdown will be of a larger magnitude.

    Like Japan, China also has a rapidly aging population and a low level of immigration so it might seem obvious that an economic slowdown there lasting up to a decade would lead directly into a period of mass retirements. And that is likely going to be the case which will indicate that the vibrancy we have seen out of China in the past will not be replicated for many, many years.

    Instead we can expect to see a continued high level of capital inflows into the US in the form of Treasuries purchases, investments in domestic and Internationally based companies and an uptake of other securities as that same aging population seeks security during a tumultous period of time.

    I am not suggesting that China is in store for a crash nor even a hard landing. Actually I do believe growth there will continue but at lower real inflation adjusted levels as the excess of the past is alowly wrung from the system.

    Incredibly, the very best bets from and investment perspective will be found right here at home and on this continent. There is much less to fear about the future than some would have us all believe.

  2. You must be kidding Whisperer. You deleted THAT last comment of mine? Maybe it is time for you to retire.

  3. As I have said before, Blogger has a spam filter that holds comments for approval. I don't know they have been held until I check the filter. This one was held (I assume because it was longer than most other posts). Nothing was deleted and held comments are approved as soon as I see them .

  4. AnonymousJune 4, 2012 6:00 AM

    I disagree. During the last great depression
    1 Kilo of gold would buy you a really nice car.

    Today 1 kilo of gold is worth $56,000 about the price of a really nice car.

    Gold is not "tanking" currencies are. Gold is mearly holding it's purchasing power in uncertain times. The money printing is far from over and if you trust any government to maintain the purchasing power of your savings especially now your crazy.