CBS (60 Minutes) reports on China's Real Estate Bubble - Updated

Says the narrator: "Non-existent supply for non-existent demand."

Hong Kong financial analyst Gilem Talick: “...multiple generations/classes of Chinese are going to be wiped out, and 50 million construction workers will lose their jobs.”

China’s bggest home builder Wang Shure of Vanke: “Homes in China are too expensive. There is a bubble of course and it will burst and its going to be a disaster.”

Analyst Anne Stevenson Yang: “The debt crisis is starting...”

Says it all.

CBS has this short bonus feature on their website in which Analyst Anne Stevenson-Yang explains how China's real estate boom was created -- and what might happen to property owners if the bottom falls out...

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Opportunities (Updated - 60 Minutes News Story)

Late last night I got together with some friends for a pre-Christmas coffee.

Invariably the conversation turned to the topics of Silver and Real Estate, triggering an update of sorts.

During the summer, 'S' had asked my opinion about real estate.

Aware of my strident stand on the issue from friends, he wanted to hear first hand my thoughts on becoming a first-time buyer with his girlfriend.

You know my answer.

And I laid out the full case: buying real estate now was a poor decision, interest rates had no where to go but up, and the looming spectres of QE2/US debt problems/and the PIIGS meant that there were far greater investment opportunities out there with which he could benefit from in the short term.

My advice: instead of buying real estate, invest any downpayment he had set aside and by the end of the year he would be way ahead of where he would have been if he bought a condo.

My recommended investment of choice?

Silver. I specifically recommended a silver mining stock known as First Majestic (FR), a stock I have referred to several times before on this blog.

[For the sake of disclosure - at the time I owned some of the stock, I have since sold all that stock and currently I do not own any of it.]

If you read this blog regularly, you know my position on this. I do not consider myself a Gold/Silver 'bug'. I am firmly of the belief that Gold & Silver is not money, nor is it a hedge against inflation (it performs that role very poorly).

Gold/Silver is a hedge, however, against the mismanagement of the state; which at this time and place is the United States with it's world's reserve currency status.

In the summer I told 'S' that it was almost a certainty that the United States would be forced to continue Quantitative Easing on a massive scale. Because of this, I opined, it seemed clear to me that a large segment of the world would be moving into the mediums of Gold & Silver on a scale that hasn't occurred in over 100 years.

At the time of our discussion, that silver mining stock (FR) hovered at the $5.80 mark.

'S' contrasted my viewpoint with the experience of a mutual friend/coworker. He had just sold his condo for $805,000 (bought 10 years ago for $300,000). With no outstanding mortgage, it was all bubblicious profit.

What did the coworker do? He bought half a Vancouver duplex for $920,000 (a property which still required $80,000 - $100,000 of renovations) confident that real estate was the best place for his funds.

I told him our co-worker was crazy. I believe he was throwing away the opportunity of a lifetime to invest that money, realize a massive return and rent in the interim.

Fast forward to the end of the year and we had a chance to review.

So what's happened since August?

Physical silver has gone up by almost 70% and the mining stock First Majestic has gone from $5.80 to a close last Friday of $13.21.

Had our mutual co-worker invested the $805,000 in that stock, he would be sitting on over $1,833,000 today; a profit of over $1 million in just four months!

I re-iterated my point.

Real Estate right now is a tremendously poor investment choice.

There are far greater opportunities for huge returns that completely dwarf real estate.

Even if real estate in Vancouver goes up the estimated 10% next year, it won't compare to what I believe you will see if you invest in Silver.

First time buyers? Same advice. Take you downpayment and invest it.

That was my advice in August and that's my advice now.

Gold & Silver still have a tremendous upside. I can see Silver easily moving to $35-$38 an ounce by spring, hitting at 10-30% correction, and then taking off again.

Why?

The economy is stalling. QE2 is not generating the desired results, Europe is in shambles with huge debt issues still to be addressed in Greece, Portugal and Spain. And looming in the background with it's own debt catastrophe is the U.K.

Meanwhile there is the United States.

The next looming crisis will be the mounting debts of the individual States in America.

Many State and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years with the problems starting to come to a head in 2011.

If you thought the Wall Street bailouts were massive, they are nothing compared to what is going to be needed for the individual US States. And the American government, along with the Federal Reserve, are not going to allow those States to go bankrupt.

QE 3, 4 and 5 are all but assured.

Canada?

Word is starting to spread that our nation's Real Estate Bubble is making our Banks look anything but sound.

Combine that with a looming credit downgrade for the Province of New Brunswick as well as for other provinces such as Ontario and Quebec and suddenly critics are saying our provincial balance sheets and economies bear a resemblance to the troubled states of Europe than a country that should be considered an oasis in the Western quagmire.

Gold & Silver are hedges against the mismanagement of the state. With what's going on in Europe, the USA, and our country, I can't envision any scenario that doesn't have massive amounts of money pouring into precious metals.

'S' was curious if my advice had changed since summer?

Not a chance.

[As always, please read disclaimer at bottom of this blog]

CBS 60 Minutes Update

Interestingly, the lead story on 60 Minutes tonight is State Budgets: Day of Reckoning. From the introduction...

• By now, just about everyone in the country is aware of the federal deficit problem, but you should know that there is another financial crisis looming involving state and local governments.
  
  It has gotten much less attention because each state has a slightly different story. But in the two years, since the "great recession" wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes. There is also a trillion dollar hole in their public pension funds.
  
  The states have been getting by on billions of dollars in federal stimulus funds, but the day of reckoning is at hand. The debt crisis is already making Wall Street nervous, and some believe that it could derail the recovery, cost a million public employees their jobs and require another big bailout package that no one in Washington wants to talk about.

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Ben Bernanke meet Jon Stewart

In case you didn't see it, Jon Stewart offered his observations on US Federal Reserve Chairman Ben Bernanke's Sunday interview with 60 Minutes.

I can't embed the clip, but you can watch by clicking here.

Bernanke said on Sunday that "one myth that is out there is that we are doing is printing money. We're not printing money."

Bernanke made this statement in response to the Fed's actions of creating money out of thin air and buying government bonds.

Stewart juxtaposes Ben's latest 60 Minutes interview against another 60 Minutes interview the Chairman gave just 21 months ago when he was justifying buying corporate assets from the banks.

• Bernanke: "To lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed, so it's much more akin, although not exactly the same, it's much more akin to printing money than it is to borrowing."
  
  Interviewer: "You've been printing money then?"
  
  Bernanke: "Well... effectively and we need to do that"

So, as Stewart notes, the difference was that then the Fed was creating money out of thin air to buy corporate assets and now it's buying government bonds.

How is it that you were printing money then, but now you're not?

Stewart observes, "I guess Bernanke was looking at the average age of the 60 Minutes viewer and betting that anyone who saw him last year is dead now."

While humorous, it does expose something that many critics are sharply focusing on: Bernanke came on national TV and lied to the American people.

In fact, as Michael Pento of Euro Pacific Captial writes, Bernanke came out and told 2 big lies.

• Lie #1 - The Fed isn’t printing money. Bernanke stated: “The amount of currency in circulation is not changing…the money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.” Given that it is the Treasury Department’s Bureau of Engraving and Printing, not the Fed, that actually prints paper money, his statement is technically correct while substantively false. However, Bernanke is buying bank assets with Fed credit. With such an arrangement, printing becomes unnecessary.
  
  According to gentle Ben, credit created to buy something should not be considered money and has no affect on asset prices? But if that’s true, why is he concentrating his buying in the middle of the Treasury yield curve. His stated purpose is to boost bond prices and lower yields in order to stimulate borrowing and aggregate demand. So pushing up bond prices is an act of inflation. Bernanke similarly contradicts himself by saying that he isn’t creating inflation, while at the same time claiming that his easing campaign is designed to boost asset prices to combat the phantom of deflation.
  
  And by the way, the Fed is causing money supply to increase significantly. The compounded annual growth rate of M2 is over 7% in the last quarter. Apparently in the eyes of the Chairman, a 7% annualized increase in the broad money supply isn’t considered significant.
  
  Lie #2- Bernanke is “100 % confident” that, when necessary, the Fed can control inflation and reverse its accommodative monetary policy. He stated, “We’ve been very, very clear that we will not allow inflation to rise above 2 percent. We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time.” He failed to mention that the Fed doesn’t have the will to drain money from the system, without which all tools are useless. The Fed has consistently demonstrated its unwillingness to take the appropriate actions when necessary. In claiming he is 100% confident in his ability to control inflation, Mr. Bernanke ignores the record that during his tenure he has misdiagnosed the economy.
  
  In June of 2006, Bernanke culminated his inflation fighting efforts by raising the Fed Funds target rate to 5.25%, after CPI inflation reached 4.2%. But that interest rate was enough to help burst the housing bubble and to spark an international credit crisis. Bernanke was completely unaware that the Fed actions had created an economy that had become completely addicted to artificially-produced low interest rates and inflation.
  
  Shortly after the collapse of the real estate market and the ensuing truncated deflationary-depression, Bernanke took interest rates to near zero percent. But if the Fed was ever really serious about unwinding excessive leverage, the time had clearly arrived. Instead, the U.S. economy has become more addicted to free money than at any other time in our history.
  
  Commodity prices are soaring once again and the real estate market, banking sector, and the overall economy cling precariously on the arm of government induced bailouts and low interest rates. Even worse, our government has massively increased its level of debt, which now stands at just below $14 trillion. Once the rate of inflation eclipses the Fed’s 2% target rate, which appears likely, how then will the Fed raise rates to contain it? Could the economy then withstand an increase in the cost of home ownership? Most importantly, when will Mr. Bernanke find it politically tenable to dramatically increase debt service payments for the Federal government? In truth, there is never a convenient time to have a severe recession or a depression. Unfortunately, reality can be extremely inconvenient.
  
  Bernanke was accurate in saying that the economy is not expanding at a sustainable pace. Of course, his prescription was the same as it always is; print more money in the misguided belief that inflation will lead to growth. As such, he indicated that it’s possible that the Fed may actually expand bond purchases beyond the $600 billion announced last month. (Remember that the $600 billion comes after the $1.7 trillion that has already been printed, which failed to produce anything much beyond a weaker dollar). Therefore, the country can look forward to yet more inflation, continued anemic GDP growth, a poorer citizenry, and a vastly lower standard of living.

All of this is followed by news that US Treasuries have suffered their biggest sell off since the collapse of Lehman Bros (see reprint of Financial Times story on this blog).

Thus when QE is supposed to be lowering interest rates, they are rising.

This dynamic is the one which all the R/E shills in the Village on the Edge of the Rainforest remain oblivious/ignorant to.

Bernanke can say he will keep interest rates low for years to come. But the market vigilantes have the ultimate say.

I've posted on this blog numerous times the fears stated by former Federal Reserve Chairman Greenspan that this could happen.

Dramatically higher interest rates are coming. It's only a matter of time.

And when they come, as Bank of Canada Governor Mark Carney has been warning for months now, you don't want to be holding debt of any significance that you can't service at interest rates at the historic norm (8.25% or higher).

People mock the Bears because the collapse has not come yet and anyone who has bought in the last 7 years is way ahead than if they had listened to the Bears.

But unless they cash in on that equity now, hardly any of those buyers will survive what is coming.

Which is why two and a half years ago I became a staunch real estate bear and highly advocate liquidating debt, eschewing debt accumulation and investing to prepare for what is coming.

Regrettably few will appreciate the advice until it is too late.

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Happy Thanksgiving

It's Thanksgiving Day today in Canada and Columbus Day for our wonderful American cousins in the United States.

Just some simple offerings on this holiday for you.

A clip from Robert Reich, promoting his new book Aftershock. There are some interesting tidbits...

And an excellent clip from 60 Minutes on flash trading...

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