About a decade ago, the Chinese government chose a policy of growth at any cost. China’s leaders see strong gross domestic product (GDP) growth not just as bragging rights, but as essential for political survival and national stability.
I believe that with every fiber of my being.
To maintain high employment, China has poured money into infrastructure and real estate projects. This explains why, in 2009, new floor space doubled and residential real estate prices surged 25 percent. This also explains why the Chinese keep building new skyscrapers even though existing ones are still vacant.
I absolutely believe that. I've stated for years that I thought China was recreating our Great Depression.
It will tank the commodity markets. Demand for industrial goods will fall off the cliff.
I believe that it is likely. I don't know when it will happen though. It could be years away even if I am right to believe it.
Finally, Chinese appetite for our fine currency will diminish, driving the dollar lower against the renminbi and boosting our interest rates higher. No more 5 percent mortgages and 6 percent car loans.
I do not believe that. Although Chinese appetite for our currency would diminish, I think there would be an enormous flight to US dollars if commodity markets tank and the Chinese miracle story becomes unhinged.
Put another way, the US dollar is an anti-commodity currency. The pain would be felt most in the commodity currencies, such as the Canadian dollar.
Compare and contrast the action in the Canadian dollar and the US dollar the last time commodity markets tanked (late 2008). That's the kind of flight to quality I'm talking about.
I'm not arguing that the US will make out like bandits if and when China stumbles (cheaper oil would help us). Most of our problems will still exist. Our problems may be fully priced in though. China's problems are not. Although their stock market is 50% off its all time high, it is still a miracle story in the eyes of many.
Update:
Caterpillar: Echo Bubble?
I bought Caterpillar (CAT) on August 10, 2000. Nobody else seemed to want it.
I sold it on July 8, 2004 for more than twice the price.
Everyone seems to want it now though. It currently trades with a P/E of 41. I'll pass.
Stag,
ReplyDeleteGood post. It will be interesting to see how China reacts when their bubble(s) finally burst.
Part of me thinks they will put off deflation as long as possible, but then embrace it.
Embracing deflation would be painful, but it would once again lower China's costs relative to the West. That would be good for them, but bad for us. After a big bust, perhaps the average Chinese worker could afford the average Chinese house. That seems like a good outcome - wealth to the people via free market mechanics.
I think state sponsored capitalism will make embracing deflation easier too. The special interests and old money likely don't exist to the extent they do here or have the influence they do here.
It's unbelievable the lengths our Fed Gov't go to protect creditors at the expense of debtors. Not exactly the free market at work.
Just thoughts.
mab,
ReplyDeleteI just updated the post with a chart of Caterpillar. I think it is an echo bubble. I would have no interest in buying it at these prices, so it is very difficult for me to embrace inflation in the mid-term.
Embracing deflation would be painful, but it would once again lower China's costs relative to the West. That would be good for them, but bad for us. After a big bust, perhaps the average Chinese worker could afford the average Chinese house. That seems like a good outcome - wealth to the people via free market mechanics.
There's just no getting around the fact that billions of people will work for less than we do. It doesn't really matter what inflation does. It doesn't really matter what the foreign currency exchange rate is.
I have no solutions. It's easy to point out the problems though. I feel like an armless art critic with no painting skills.
mab,
ReplyDelete"After a big bust, perhaps the average Chinese worker could afford the average Chinese house. That seems like a good outcome - wealth to the people via free market mechanics."
Well, I sure hope it works out that way for them because if you replace "Chinese" with "American" in the above paragraph it sure as hell didn't work out that way for us.
Stag,
"Compare and contrast the action in the Canadian dollar and the US dollar the last time commodity markets tanked (late 2008). That's the kind of flight to quality I'm talking about."
In those charts you're plotting a 40-week SMA which is nearly identical to the 39-week I use to make trend line decisions. Notice in the CDW chart how, after it crosses the 40WK in April of last year, it makes a terrible whip-saw down to 85 before heading up again.
Now note in the current chart of USD a similar whip-saw which we are experiencing as we speak. Given the fact that I recently took up a position in UUP you probably know where I'm going with this ;-)
"I bought Caterpillar (CAT) on August 10, 2000."
Dude, you just plain have BALLS if you bought ANYTHING (equity related) in August of 2000. You literally bought at the peak of the tech-bubble market in S&P and DOW! But you were right.
I wish I would have bought PACCAR (PCAR) when you bought CAT. But no way I was buying anything in late 2000. In fact, by then, I was a rapid seller of all equities (mostly mutual funds at that time.)
Notice how a man could have made money in selected stocks during the '00/'02 recession/bear market but just about everything, and I mean everything, went South during the recent bear. It is different this time.
G.H.,
ReplyDeleteI wish I could say that Caterpillar was the last stock I ever bought, but I just had to go "bargain" hunting when the tech stocks crashed. In hindsight, February of 2001 was a bit early, lol. Oops! At least I only dabbled. I did not back up the truck.
That said, I've kept records of my net worth going back to May of 2000. (I was 75% invested in the stock market then.)
In inflation adjusted terms, I'm actually better off than I was then. In hindsight, not bad considering first that it was one of the most difficult investment periods in our country's history, and second that I have not had a job and must use my investments to pay ongoing living expenses.
One thing that clearly offset some of the pain was putting a third of my net investable worth (excluding my home) into gold and silver from 2004 to 2006. Although I did not hold the position as long as some have, at least I bought with conviction.
I cannot continue the pace though, based on my current investments. At best I will break even with inflation from here, once taxes and ongoing expenses are factored in. That's fine with me though. I don't mind spending principal to live. I don't mind dying broke someday.
My money is locked up in TIPS and I-Bonds. There's just no squeezing much blood from those turnips. They are what they are and no more.
It's a sad state of affairs that I prefer to have 15% of my net investable worth sitting in a checking account right now paying just 1% or so in interest while I wait for another bargain that may never come.
I wish I could see something I'd want to buy with conviction these days, but I just can't.
Stag,
ReplyDeleteWell played with CAT.
Here are a few stocks that I wish I owned just for "today".
http://finance.yahoo.com/q?s=ir
http://finance.yahoo.com/q?s=ish
Stocks are a riddle "today".