"China: First Stocks, Then Real Estate, Then Us"

China: First Stocks, Then Real Estate, Then Us

By Harry S. Dent Jr., Senior Editor, Economy & Markets

I always say bubbles burst much faster than they grow. And after exploding up 159% in one year, Chinese stocks crashed 35% in three weeks.

This all happened while the Chinese economy and exports continued to fall. And two thirds of these new trading accounts belong to investors who don’t have so much as a high school degree. How crazy is that?

...the Chinese government is taking every desperate measure to stop the slide:

Artificial buying to prop up the market…

Banning pension funds from selling stocks…

Threatening to jail investors for shorting stocks…

Allowing 1350 out of 2900 major firms to halt trading in their stocks indefinitely, and stopping trades on another 750 that fell 10% or more…

It’s madness!

This second and FINAL bubble in Chinese stocks occurred precisely because real estate stopped going up. Over the last year it actually declined.

So after decades of speculation, the gains stopped coming in, and rich and poor investors alike switched to stocks.

But the funny thing about the Chinese is – they don’t put most of their money in stocks. Only about 7% of urban investors own stocks and half of those accounts are under $15,000. In fact, it’s estimated that the Chinese only put 15% of their assets there, and that may be on the high side.

What is so unusual about the Chinese is that they save just over half their income! And the top 10% save over two-thirds!

And where do those savings go? Mostly into real estate!

China’s home ownership rate is 90%. It’s just 64% in the U.S. even though we’re much wealthier and credit-worthy.

That’s because home ownership is a staple of their culture. A Chinese man has no chance of getting a date or getting laid unless he owns a home – no matter how small.

Just look at this simple chart:

See larger image

Chinese households have 74.7% of their assets in real estate vs. 27.9% in the U.S. – which helps explain why theirs is one of the greatest real estate bubbles in modern history!

But the key here is – when that bubble bursts, it will cause an unimaginable implosion of Chinese wealth. In one fell swoop, three-quarters of their assets will get crushed!

And just how big of a bubble is it? In Shanghai, real estate is up 6.6 times since 2000. That’s
560%.

I’ve been going on and on about the massive overbuilding of basically everything in China for years now. I’ve never once flinched from my prediction that this enormous bubble will burst. And I’ve kept saying there will be a very hard landing no matter how much the government tries to fight it.

Central banks had been setting this global bubble up from 1995 to 2007. China’s government – even more so!

By my estimates, they’ve built up their infrastructure, real estate, and industrial capacity 12 to 15 years ahead of demand. And that’s if urbanization continues at such astounding rates. Good luck on that in a slowing world economy!

In a massive overhaul of their economy, they did this to provide jobs for half a billion people who moved from rural plains to urban cities over the past three decades. It was so rushed that 220 million migrated in just the past 12 years and aren’t even legal citizens in the cities they live in!

Now, China’s ambition has cost them. A sharp 35% correction in their stock market tells me that this second and final bubble has already peaked and is definitely bursting.

As for us, remember that China led the global collapse in 2008. The last bubble saw a six times gain in just two years and a 72% crash in just one.

And while stocks are bouncing in China right now, I see almost no chance of them making a new high back above 5,178 on the Shanghai Composite.

If I’m being realistic, they’ll probably bounce to 4,300 over the coming weeks, but then start crashing again by September at latest. After that, I expect they’ll fall sharply for a year or so.

If they crash down to 2,000 and as low as 1,000 which I suspect they will, then the economy and real estate will come next. And like I’ve said, that will destroy massive amounts of wealth and take years to shake down.

Then beyond China, it’ll send shockwaves through real estate worldwide.

After all, who are the leading buyers in cities like Sydney, Singapore, L.A., San Francisco, New York, Vancouver, and London? The Chinese! Just in 2014, they accounted for 24% of the total real estate purchases in the U.S. at some $22 billion!

You don’t have to be Einstein to understand what happens when foreign buyers with that kind of horsepower come to a halt.

But there is another layer to this – the country’s affluent have been fleeing their country in droves by moving “temporarily” to major English-speaking cities, in part to get their kids a top-notch education.

Except what they’re really doing is laundering their money out of the country by buying the most expensive real estate they can afford, usually for cash!

China’s government will only put up with this for so long – especially when their economy starts to putter out. They’ll have to stop this exodus sometime in the next year or so, and when they do, it will cause the global real estate bubble to implode...

Just like I don’t want you to get caught off guard by a global selloff in stocks, I want you to be aware when real estate and world economies follow...


Harry Dent"

Hoisington & Hunt: Truly...the wisdom of long-term thinking?

Quarterly Review and Outlook Second Quarter 2015

Misperceptions Create Significant Bond Market Value

"From the cyclical monthly high in interest rates in the 1990-91 recession through June of this year, the 30-year Treasury bond yield has dropped from 9% to 3%. This massive decline in long rates was hardly smooth with nine significant backups. In these nine cases yields rose an average of 127 basis points, with the range from about 200 basis points to 60 basis points (Chart 1). The recent move from the monthly low in February has been modest by comparison. Importantly, this powerful 6 percentage point downward move in long-term Treasury rates was nearly identical to the decline in the rate of inflation as measured by the monthly year-over-year change in the Consumer Price Index which moved from just over 6% in 1990 to 0% today. Therefore, it was the backdrop of shifting inflationary circumstances that once again determined the trend in long-term Treasury bond yields. 

 In almost all cases, including the most recent rise, the intermittent change in psychology that drove interest rates higher in the short run, occurred despite weakening inflation. There was, however, always a strong sentiment that the rise marked the end of the bull market, and a major trend reversal was taking place.

This is also the case today. Presently, four misperceptions have pushed Treasury bond yields to levels that represent significant value for long-term investors. These are:

1. The recent downturn in economic activity will give way to improving conditions and even higher bond yields.

2. Intensifying cost pressures will lead to higher inflation/yields.

3. The inevitable normalization of the Federal Funds rate will work its way up along the yield curve causing long rates to rise.

4. The bond market is in a bubble, and like all manias, it will eventually burst..."

LINK

China...it's just a matter of time...same as US...how long can you hide unmanageable leverage?

"China’s economy is collapsing to levels on par with those last seen during the Asia Financial Crisis"

The Black Swan That 99% of Analysts Ignored Is Here

"Let’s talk briefly about China.

China is thought to be the great growth story of the post-2008 era. China’s economy not only bottomed before the developed world, but by most accounts, China was thought to be the engine that pulled the world out of recession, thanks to its near-clocklike hitting of 7%+ in GDP growth per year.

Today, China remains central to the notion that the world is in recovery. As Japan’s Abenomics gamble sputters out economically while Europe continues to deteriorate and seems at risk of even breaking apart, it is China and the US that are held up to be the last remaining sources of economic growth for global economy.

Of the two, China is the only one thought to be growing at a significant pace. The US’s “recovery” (if it can be called that) is effectively flat lining, producing data points that are normally associated with a recession.
China, on the other hand, is believed to be growing at 7%: not as rapid as the 9% growth we’re used to seeing, but still dramatically higher than any of large country.

Only the whole thing is bogus.

Firstly, China’s economic data points are fraught with accounting gimmicks. Indeed, they are so far removed from reality that back in 2007, current First Vice Premiere of China, Li Keqiang, admitted to the US ambassador to China that ALL Chinese data, outside of electricity consumption, railroad cargo, and bank lending is for “reference only.” 

Put another way, if you want to get an ACCURATE picture of the true state of China’s economy, you have to ignore GDP and most other metrics, and electricity consumption, railroad cargo, and bank lending.

Of the three, rail freight volumes is the most significant as it is the hardest to fake. And according to China’s rail freight volumes, China’s economy is collapsing to levels on par with those last seen during the Asia Financial Crisis (h/t RBS Economics)



Rail traffic is not the only metric showing pronounced weakness. As ZeroHedge noted a few months ago, based on China’s electricity consumption is rolling over, suggesting a pace of growth closer to 3.5%.



As for bank lending, we all know that China’s shadow banking system has expanded at pace beyond anything else in the world. Since 2008, China’s real economy is believed to have grown by $4 trillion. However, its banking assets have more than QUADRUPLED this, growing to nearly $17 trillion.



Where does this leave China today?

With a weak economy that is at best growing at 3.5% and at worst in full-scale contraction… and a banking system that is leveraged beyond anything else in the world.

China was rife with bubbles in real estate and stocks. Indeed, by some measures, the China stock bubble was even more overvalued that the NASDAQ Tech Bubble of 1999!

And yet, 99% of investors believed that China’s economy is growing rapidly. These folks ignored one of the largest black swans in the system today.

And now they're being taken to the cleaners... ."

Graham Summers
Phoenix Capital Research

China's industrial (fixed investment) metal-eating monster on a diet?

“Private equity is selling everything that’s not bolted down. With the robust valuations in today’s market, they are accelerating monetizations of companies they own.”

"It’s clear that we are currently in an environment of frothy valuations,” said Lise Buyer, founder of IPO advisory firm Class V Group.

Her disturbing punchline: "The insiders - those with the most knowledge - are finding this a very good time to take some money off the table."

This year, private-equity firms sold $73 billion of their buyouts to the public, a record amount over a six month period, Bloomberg data show..."

LINK

"Today is Day 1 of Year 7 of the 'recovery'...what is priced in is that everything will work itself out at the 11th hour..." Asymmetric risk (not priced in)?