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â€œWeâ€™re not bearish enough [on China].â€ â€“ Jim Chanos
Oh my… China is breaking down. Europe is slipping. And there goes the US too…with stocks down 172 points on the Dow on Friday, closing out a 6th straight week of losses.
Even if the US holds itself together, thereâ€™s a good chance that either Europe or China will drag it down.
The latest reports show Chinaâ€™s property bubble beginning to lose air. The Wall Street Journal reports:
After years of housing prices gone wild, Chinaâ€™s property bubble is starting to deflate.
Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.
Real estate is a foundation of Chinaâ€™s phenomenal growth record in the past two decades, and its health is crucial to Chinaâ€™s construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay.
And legendary short seller, Jim Chanos, says Chinaâ€™s local government debt is worse than Americaâ€™s subprime problem. Subprime debt in the US never surpassed 10% of GDP. Chinaâ€™s local governments have debt (much of it bad) of more than 30% of GDP.
We went to China recently. We were unable to form a clear opinion about it. Yes, there were plenty of buildings that looked empty…but the streets were full of people.
And there is so much money in China! A friend is an antique dealer in Paris. He tells us that the hottest segment of the market is Chinese antiquities. As soon as something comes on the market, a buyer from China snaps it up. Hereâ€™s an example. In March, an antique China vase was auctioned off at Sothebyâ€™s. The auction firm had appraised it at $800 to $1,200. Instead, it sold for $18 million.
With that kind of cash available, why worry about empty apartments? Surely, the demand will meet up with the supply, right?
Trouble is, without the discipline of the free marketplace, you never know what the demand really is. And given a lot of extra cash and credit from the feds, supply tends to overshoot, often spectacularly.
Without the light of real, free markets, buyers and sellers wander around in the dark like blind drunks. They stumble into each other. They fall down. They bloody their noses and make an awful mess.
In the heady air of post-commie central planning, China may have less than 10% of the worldâ€™s GDP, but it buys more than half its cement â€“ and nearly as much of its iron ore, steel and coal.
What does it do with all that? It adds supply! It builds.
From first hand observation we werenâ€™t able to draw much of a conclusion. But theory tells us that there is no way you can invest that kind of money â€“ often with the help of local governments â€“ without making some major mistakes.
Of course, thatâ€™s why there are corrections. Thatâ€™s why every boom caused by excess, artificial credit is followed by a bust of excess, un-payable debt. Which is also why, here at The Daily Reckoning, we like corrections. They are like soap and water. They help get rid of accumulated debt dirt. And the grease of bad guesses. And the parasites that accompany a plan-gone-bad. So, lather up. Rinse well. And youâ€™re fresh and ready to go again.
But the authorities donâ€™t like washing up. After all, one manâ€™s grease is another manâ€™s career path. And the parasites vote.
The Chinese authorities may or may not be smarter than their American counterparts. But theyâ€™ve got parasites to look out for too. Voters? Maybe not…but theyâ€™ve got plenty of officials…and some 100 million young men looking for work; theyâ€™re desperate to keep them busy.
We donâ€™t know whether a Chinese blow up is around the corner or not. But it could happen any minute.
(One of the Chinese stocks in our Family Office portfolio is trading at only 2 times earnings. It was more when we recommended it. And if China blows up, it will go lower still. Perhaps they will give it away at the bottom.)
Meanwhile, Europe grows more troubled and more troubling. The Greeks want money. The Germans want austerity. The European Central Bank wants another bailout. Germanyâ€™s finance minister says heâ€™ll support more money for the Greeks only if lenders agree to take a haircut first.
In the streets of Athens, demonstrations have become everyday occurrences. And the government, desperate to raise money, is said to be putting price tags on the Parthenon, the Acropolis, and several islands. â€œDiscount!â€ â€œGoing out of business!â€ â€œInventory Reduction Sale!â€
It is not our place to give advice, but we will give it anyway. It is the same advice we give to underwater homeowners.
It is obvious that Greece cannot work its way through this problem. It would have to increase GDP by 12% a year for three decades in order to â€œgrow its way out of debt.â€
Since it cannot pay its debt honestly, it should at least default forthrightly. Stop sniveling and complaining. Own up to having erred.
Donâ€™t borrow more money, in other words; renege…walk away… Be of good cheer, knowing that lenders will suffer the losses they deserve.
Default and be happy.
America is so rich…and so wasteful…that it could probably cut its spending by half and most people would still be fat and sassy.
Hereâ€™s a report from The Daily Mail in London:
The US is providing hundreds of millions of dollars of foreign aid to some of the worldâ€™s richest countries â€“ while at the same time borrowing billions back, according to report seen by Congress.
The Congressional Research Service released the report last month which shows that in 2010 the US handed out a total of $1.4bn to 16 foreign countries that held at least $10bn in Treasury securities.
Four countries in the worldâ€™s top 10 richest received foreign aid last year with China receiving $27.2m, India $126.6m, Brazil $25m, and Russia $71.5m.
Mexico also received $316.7m and Egypt $255.7m.
And yet despite the massive outgoings in foreign aid, the receiving countries hold trillions of dollars in US Treasury bonds.
China is the largest holder with $1.1trillion as of March, according to the Treasury Department.
Brazil held $193.5bn, Russia $127.8bn, India $39.8bn, Mexico $28.1bn and Egypt had $15.3bn.
And hereâ€™s another little item. As we keep saying, man is neither good nor bad, but subject to influence. And whatâ€™s the real effect of modern communications technology? A report from Miller McCune.com:
From reality television to dumb-and-dumber films, contemporary entertainment often amounts to watching stupid people do stupid things. New research suggests such seemingly innocuous diversions should have their own rating: LYI.
As in: Watching this may Lower Your Intelligence.
A study from Austria published in the journal Media Psychology found students performed less well on a general-knowledge test if they had just read a short screenplay about an idiotic thug. This suggests stupidity may indeed be contagious â€“ particularly if it is presented in narrative form.
â€œNarratives tend to make people â€˜walk in someone elseâ€™s shoes,â€™â€ Appel notes. Since that experience can be temporarily transformative, you might want to make sure the characters you follow have IQs higher than their shoe size.
The Bigger Debt Problem: China’s Local Government Debt vs. US Subprime Debt originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
Lots of pessimism since QE2 is deemed a failure and no QE3 is coming.Â Â Here’s one article that reminds us to ensure we are risk aware and maintain an intelligently adusting protection strategy.Â Â Â Â Posted at Seeking Alpha by Michael T. SynderÂ Â http://seekingalpha.com/article/274478-the-next-crash-could-be-a-lot-worse
The Next Crash Could Be Alot Worse
here’s a lot of emotion in this market at the moment, and the conversations among traders are nearly all leaning toward the bear side
So what are some of the signs that this downturn on Wall Street may turn into a full-blown crash?
Well, according to the Wall Street Journal, junk bonds are being sold off at an alarming rate right now. Does the following quote from the Journal remind anyone of 2008 at least a little bit?….
A steep decline in prices of bonds backed by subprime mortgages has spread through the riskiest segments of the credit markets, ending rallies in high-yield corporate bonds and commercial real-estate debt.
Also, many of the big Wall Street banks are already laying off workers. In a previous article I wrote about the potential for Wall Street to go into “panic mode“, I noted that Goldman Sachs (GS), Bank of America (BAC), JPMorgan Chase (JPM) and Morgan Stanley (MS) are all laying people off or are considering staff cuts.
The truth is that the big banks on Wall Street are not nearly as stable as most people think that they are. Moody’s recently warned that it may downgrade the debt ratings of Bank of America, Citigroup and Wells Fargo.
Another major story on Wall Street right now is oil. OPEC recently announced that oil production levels will not be raised, even though the price of oil has been hovering around $100 a barrel.
World oil supplies are very tight right now. In fact, the globe actually consumed 5 million barrels per day more oil than it produced during 2010. This was possible because the difference was apparently made up by drawing down reserves.
But if oil supplies are this tight already, what is going to happen if a major war (as opposed to all of the minor wars that are already happening) erupts in the Middle East?
The world is sitting on the edge of a financial disaster.
It is important to keep in mind that Europe is also in far worse financial condition than it was just prior to the financial collapse of 2008.
It is being reported that German finance minister Wolfgang Schaeuble is convinced that a “full-blown” financial meltdown by Greece is a very real possibility. The cost of insuring Greek debt has soared to a brand new record high, and officials all over Europe are in panic mode.
But financial problems are not just happening in Greece. The largest bank in France has just cut in half the amount of cash that customers can withdraw from ATMs each week.
Most Americans don’t spend much time thinking about the financial condition of Europe, but the truth is that what happens in Europe is going to play a major role in the months and years ahead.
Of course most Americans already know that the U.S. government is a financial mess.
As the “debt ceiling deadline” of August 2nd draws closer, the U.S. government has been raiding retirement funds in order to stay under the debt limit.
Many investors are quite nervous about what may happen if the U.S. government actually does start defaulting on debt on August 2nd.
Others claim that the U.S. government is already in default.
The only Chinese agency that gives credit ratings on sovereign debt says that the U.S. government “has already been defaulting” and the Chinese government has been repeatedly warning that the U.S. needs to get its finances in order.
In any event, this debt ceiling drama will get resolved one way or another.
The bigger question is this….
How is the U.S. government going to respond when the next financial crash happens?
Back in 2008, the Federal Reserve and the U.S. government took unprecedented steps to prop up Wall Street.
But can they really do that again if we see another major crash in 2011 or 2012?
Many believe that things will be totally different this time around. Just check out what Jim Rogers recently told CNBC….
“The debts that are in this country are skyrocketing,” he said. “In the last three years the government has spent staggering amounts of money and the Federal Reserve is taking on staggering amounts of debt.
“When the problems arise next timeâ€¦what are they going to do? They canâ€™t quadruple the debt again. They cannot print that much more money. Itâ€™s gonna be worse the next time around.”
Jim Rogers is right about that.
The next time we see a collapse on the scale of 2008 it is going to be a much bigger mess.
Global financial markets are extremely vulnerable right now and there are a whole host of potential “tipping points” which could push them over the edge.
The Federal Reserve and the U.S. government more or less used up all of their ammunition on the 2008 crisis.
If we see another collapse in 2011 or 2012 there is not going to be much of a safety net available.
The entire world financial system is simply swamped with way too much debt. The world has never seen anything even remotely close to the gigantic mountains of debt that have been accumulated around the world today.
The current global financial system is not sustainable. More crashes are inevitable. A lot of people are going to get steamrolled.
Hopefully you will not be one of them
Read more here:
The Next Crash Could Be Alot Worse
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