1

Bad things happening to commies is always a good thing.

It's funny, despite talking heads' claims to the contrary, they depend on us a lot more than we depend on them.

If they stop sending us their cheap crap, we won't be able to afford so much crappy merchandise that we have to throw away after a month or that will poison us. WalMart hardest hit.

Like the crappy commie watch I just got through Amazon (from a related retailer), I've been looking for a wind-up watch and Amazon had a "military replica" watch for $30, I didn't realize it was going to be from commie China.

It loses a minute a day or more, sundials are more accurate. Now I have to get one that works.

If we stop buying their cheap crap their economy crashes and burns.

They think they're selling us the rope we're going to hang ourselves with. The problem, of course, is that the cheap, commie rope will break before it breaks our necks or suffocates us.

2 I hear both sides of the China story from time to time.  On the way-too-optimistic side are Jim Rogers and Tom Friedman, though Rogers is way smarter than Friedman. Rogers makes the point that Asia-in-general (China, Singapore, etc.) has been building capital rather than spending it down like the West has, and that point has some merit.  Tom Friedman and Robert Reich get wood just thinking about how "efficient" the Chinese model is.

On the other hand you get these horror stories about nearly empty brand-new cities in China.  Those stories are probably exaggerated, but to the extent that the economy remains centrally planned there, they won't be able to avoid massive misallocations of capital that have the potential to make free-market misallocations look tame in comparison.

Also, I wonder about a cultural point here.  It seems to me it would be really hard for the Chinese gov't to send a subtle signal.  They can hardly encourage stock market participation without REALLY encouraging it and having everybody and their uncle buying up stocks/real estate/etc.

Faber/Schiff, etc keep saying things like "the US will definitely default", though when pressed they say this might occur just by paying out less in entitlement benefits than previously promised. That seems rather obvious to me, but I guess technically you could call it a "default" of sorts, even though "default" implies something a little more significant in my mind.

3 I would suggest that you can't put Singapore and China in the same basket.
I would be surprised if Singapore wasn't building up capital.

China, otoh, gives the appearance of building capital.

I just had a self-described socialist talking about China building up its railroad infrastructure.
Probably, but I bet a dollar any rail they're building is substandard and prone to failure and will not/cannot be used as much as it should.
I just checked (mid comment Update) and it's part of the 11th 5 year plan.
What is it with commies and 5 year plans?

4 A few critical points on the collapse of China's real estate bubble. 1) Home buyers have to put down 20% down payments or more for their mortgage (average is 50%). This means when the house price collapses, the first person hit is the homeowner, not the banks. And many homes are bought with cash on the barrel - no risk to banks at all. I am not sure about commercial real estate though. I think a crash there is not systemic like ours was. 2) Most of the home buying is rich people who don't know what else to do with their money. Interest rates are low, can't invest overseas in stocks, Chinese stocks falling...well, let's buy another luxury villa. Its amazing at these expensive villas get built and cost literally US$ 500k+. I don't know how much of a real market there is for those and how much is just parking money in those "empty cities." 3) China had a bust already once before in housing - I think they can weather the storm of another one, but it would lower their growth rate. I do not know how much of their imports is for housing/real estate materials. That would be interesting to know. I suspect its a lot. So, if there is a crash, the Yuan might even have more pressure to appreciate not depreciate (which is the fear of some economists.) Disclosure: I have lots of Yuan sitting in CD accounts in China waiting for appreciation...already made money on the 8.2 -> 6.85 move.

5

The biggest drag on America's economy is political corruption.  Not the type of corruption where every 'reform' lines the pockets of insurance companies and bankers, but the 50% of each contract has to get funneled back to the congressman corruption.  It doesn't actually cost $2.5 million dollars to widen a mile of highway.  It doesn't actually cost $50 million to buy basic workhorse computers for a public library.

China has that type of corruption in spades compared to America; it is a huge drag on their economy and too many analysts don't properly account for it. 

6

First, if there is a bubble, it makes little difference whether real estate is bought for cash or with loans.  If supply is too high for final demand (those who would actually live in homes), then demand is artificial and prices will eventually decline (or stagnate while demand catches up to supply).  The key metrics are price-to-income (should be about 3x) and price-to-buy-vs.-rent (should be about 100x).  I have a feeling these are way out of whack in China, although I haven't seen any hard data.

Second, there is a big difference between commercial and residential real estate markets.  Chinese banks are most definitely hugely extended in CRE.  I have no idea whether they are or not in residential.  If they're not, one has to wonder where the large cash sums for these purchases are coming from.  If it's cash from wealthy businessmen whose fortunes are dependent on overleverage in the economy, then it's almost the same as the banks being overextended.

Is China in a RE bubble?  They have to be in a bubble of some sort based on the way their government is artificially stimulating, and RE pricing is probably the most out of whack.  Can they weather a big downturn better than the US?  That's a point of serious debate, with some like Jim Rogers firmly in the China camp, while other respectable investors believe otherwise.  Personally, I think it's going to be the difference between getting punched in the kidney and getting punched in the nose -- they're both going to hurt like hell, so arguing about which is worse is a bit futile.

7

China has a big problem that isn't talked about much -- statism means a lot of people being paid for digging holes and filling them in again.  Those holes (malls with 10% occupancy, residential buildings no one can afford to live in) are currently being treated as GDP but that only grows the economy as long as they're still recovering from economic levels reflecting insane Maoist policies like having people try to make the country's steel in their fireplaces at home.  A lot of what China is doing would actually shrink a more advanced economy like our own.

<i>forcing some systemic changes in things like the artificially low peg of the Yuan to the dollar.</i>

No, it would do the opposite.  You <i>devalue</i> your currency in bad economic times.

Manufacturing jobs are not coming back, ever.  Efficiency--driven growth will come from entrepeneurs and new tech.

8 I'm gonna go out on a limb here and question something Hermit Dave said. (gulp!)

I would think it would make quite a bit of difference whether RE (of the speculative, bubble-iscious variety) was purchased cash or with bank financing due to the wonders of fractional reserve banking and the tendency for contagious credit collapses from that.  Rich speculators might be overextended, but could they extend themselves as far as a bank could, and even if so, are there enough of them to pose similar kinds of systemic risk?

9 I was recently offered 1.4 million Chinese Yuan for my crappy 1000 square foot apartment in Tianjin, China.  That's over 200 thousand dollars for a 6th floor walk-up.  No garage or covered parking available.  No yard or storage area.  Leaking roof.  No central air.  Rents are low.  B.U.B.B.L.E.  I'm taking the money. 

10

Heh Joe, I don't mind honest questions and opinions -- it's ignorant snark I can do without.

The reason why I say it's almost the same has to do with where the money comes from.  An example:

Let's say the executives of a major financial company are running the company into the ground with huge leverage, crappy assets, and extremely generous marks on said assets.   On paper, the company looks fine, and seems to be extremely profitable.  The executives get huge payouts.  Note that this is pretty much the situation of most of the world's banks (and increasingly governments).

If the executives then invest their payouts in real estate, these purchases show as cash transactions.  However, the risk which allowed these purchases is still on the book of the company.  Thus, the risk is still there, but just one step removed.  This example can apply to any company that uses excessive leverage to enhance short-term profitability (eg. GM).  Hope that makes sense.

11

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