Posts Tagged ‘crash’

Do you think China will crash soon?

Thursday, August 5th, 2010

Today, we will be doing something a little different. Instead of us doing the talking, we will let you discuss and brainstorm this question.

A little background about this question. In many of the interviews with Marc Faber, he correctly predicted that China will slow down. Furthermore, he suggested that there’s a possibility that China may crash, though he stressed that he’s not predicting that it will happen. Interestingly, he mentioned about “loan-sharking” creating credit problems in China:

Well, I?m not sure. Because if [the Chinese government]? ease off again, the speculation [of property] will go on. But we have credit problems in the property market undoubtedly. We have Ponzi schemes like of loan sharking operations all over China. That?s a very dangerous, and so forth.

We find the word “loan sharking” very interesting. It seems to imply something about the Chinese credit market that is by definition, underground. That is where Black Swans lie.

On the other hand, one of our readers, Paul, who lives in Beijing, has different views about China (see Concerns about China?s slowdown):

It takes years to understand the Chinese psyche, and it’s virtually impossible to get even close from outside the country. Yes, there’s a correction going on, but it’s controlled at the core. Outcomes and reactions will of course be wild and woolly, such as the steel production slowdown.

As for ghost cities, well of course, if you don’t understand how the chinese work, you will think they are ghost cities. But that’s how they do things here – they build the whole damn thing, then move the people in. As I said, you have to understand the Chinese way of thinking.

Put this in your diary. The restrictions will last until November. By December this year, production of key items such as steel and cement will be returning to full pelt.

So, do you think China will crash soon? Please vote below and feel free to contribute your opinions.

Is the coming ‘crash’ in China not a real crash?

Thursday, January 14th, 2010

By now, you would have known that we have grave reservations on the quality of China’s post-GFC economic rebound. We are not alone in our reservations as there are many experts, both in the mainstream and non-mainstream media who share our view. But there are also many others who seems to hold the opposite view, including Jimmy Rogers.

For those who are looking for answers, all we can say is that China is very difficult to read. It is a country with many mirrors. When we Westerners try to interpret China through a Western lens, culture and context, we may end up misinterpreting, misunderstanding and missing the subtleties of China.

Economic data from China is something that investors should not swallow entirely without question as no one knows how accurate they are or how much of them are made up. As data flow from the bottom to the top layers of the vast Chinese bureaucracy, from the local government to the provincial government and finally to the central government, we wonder how much of the information are lost, misinterpreted, fudged, revised, falsified, misrepresented, hidden and added? Or perhaps we are too cynical?

But if you hold the view that a a big economic correction is coming to China and wants to ‘short’ the country, you have to be aware of what you are betting against. First, you are betting on deflation in China, symptoms of which include falling asset prices, rising unemployment and bankruptcies. Governments, on the other hand, would prefer to err on the side of inflation. When you have an authoritarian government that can make and change the rules, you can be sure that they will draw out the big guns to fight against deflation. For example, what if a trade war threatens to do serious harm to the Chinese economy and social stability? We wouldn’t be surprised if the Chinese government whips out nationalistic sentiments, point the finger at the nations that started the trade war and in the extreme case, start a shooting war. According to Marc Faber, he reckoned that the same would apply to the US too.

But let’s not get too carried away with expecting an almighty economic ‘crash’ in China Let’s play the devil’s advocate for now and examine the reasons why Jim Chanos (the guy who publicly wants to ‘short’ China) may be wrong.

As a whole, China is not too leveraged (unlike countries like Australia, US and UK). The people in major cities (especially Shanghai and Beijing) are highly leveraged and share many similarities with highly indebted Australians and Americans. For example, the housing bubble in Shanghai is much bubblier than the one in Australia. Credit card habits of the city young adults are just as bad as their Western counterparts. Since the financial system in China are still very much primitive compared to countries like Australia, US and UK (the financial sector in those countries are probably too big), the debt disease have yet to reach everyone in China, especially the hundreds of millions of rural peasants.

At the same time, the rich-poor gap in China is much wider than in Australia. For example, there are still hundreds of millions of poor peasants living in under-developed or undeveloped rural areas. Large swathes of China have yet to develop and catch up with the affluence of the coastal cities. A deflationary crash will affect the highly indebted city folks much more than the rural peasants. Since the fruits of China’s economic boom have largely bypassed the latter, they will hardly miss the loss of wealth due to an economic correction because they have not gained much in the first place. Whether boom or bust, these people will still go about their business everyday.

Deflation, in fact, will benefit those on the poor side of the rich-poor divide. The economic boom has a very detrimental effect on them as the price inflationary effects actually made them poorer (we heard stories of migrant workers in Shanghai who are too poor to even buy food). Deflation re-distributes wealth to these people. Currently, the Chinese government is in the process of developing the poorer regions in China. That, plus deflation may re-distribute economic resources and activities to those areas. For example, those same migrants workers who are too poor to buy food in Shanghai may want to return to their home villages because of better opportunities (from government development) and better standards of living (food are probably cheaper and affordable there).

If this theory is correct, it means that a ‘crash’ in China should not be interpreted in the same way as a crash in Australia, Japan or the US. In the Western world (including Japan), an economic crash means that the standard of living for everyone in general will decline. For China, because of its relatively wider rich-poor gap, it may just be a wealth re-distribution exercise in which some will be better off and some will be worse off. On paper, a Chinese ‘crash’ is bad in terms of GDP growth and demand for resources. But socially, it may not be such a bad thing as it may be China back into a more sustainable growth path.

That could be the reason why people like Jimmy Rogers are still optimistic on China. Investors like him are probably not investing their capital on the frothy affluent cities. Instead, he is probably investing in sectors of the Chinese economy that will still be humming along and going about their business even when the ‘crash’ hits the economy. Unfortunately for many investors, the ‘China’ that their investments are in will probably not survive the ‘crash.’

Liquidity?Global Markets Face `Severe Correction,’ Faber Says

Tuesday, January 16th, 2007

Marc Faber, the legendary contrarian, predicted the 1987 stock market crash, had this to say. He singled out emerging markets for a correction, especially Russia, followed by China (see China is tightening liquidity) and India. In that correction, all asset markets will be affected.

What is the rationale behind Faber?s prediction?

First, we have to understand the concept of ?liquidity.? What is ?liquidity?? There are other meanings for the word ?liquidity?, but for the purpose of this article, we will stick to the quick and dirty definition of ?liquidity? being ?money? in the financial system. Now, how do we define what is the ?money? in liquidity? Traditionally, ?money? is just what it is?cash and deposits. But today, with the advances in finance, ?money? is no longer as easily and clearly defined as before. As a result, money substitutes are becoming proxies for money and playing a much more important role in global liquidity than before. Examples of money substitutes include credit (e.g. mortgage-backed securities) and derivatives.

Now, what has liquidity got to do with the asset markets?

As you may have noticed, stock markets around the world are in record high territories. What is driving the stock markets is liquidity?the sheer weight of money and money substitutes chasing after a limited supply of assets (bonds, stocks, art, etc), resulting in skyrocketing prices. Therefore, any crunch in liquidity will result in collapsing asset prices.

How is it possible for liquidity to be crunched?

The problem with liquidity is that most of the ?money? in it is made up of money substitutes, most notably derivatives. Today?s modern financial system is such that when the central bank ?creates? money, money substitutes get spawned multiple times. The outcome is a pyramid of ?money,? with hard cash at the apex and derivatives at the bottom. The financial assets between the apex and bottom include cash deposits (spawned and multiplied from hard cash through the fractional reserve banking system) and credit (e.g. securitised debt). In such a liquidity pyramid, the values of financial assets at the lower part of the pyramid are derived from and backed up by the financial assets above it. Since much more of global liquidity are composed of ?money? in the lower part of the pyramid, any contraction in the upper parts of the pyramid will result in a multiplied contraction in the lower parts. If the liquidity contraction is severe enough, asset prices will fall precipitously, which in turn may trigger even more contraction in liquidity. This is called a ?market crash.?

Thus, as long as the central bank can influence the increase in liquidity into the financial system, asset prices will rise. If for whatever reason, liquidity contract severely enough, asset prices will collapse.

The question is, are we now ripe for a contraction in liquidity?

Crowding at the exits

Sunday, January 7th, 2007

Recently, we had done anecdotal verbal surveys and observations among the people we know. We notice these curious trends:

  1. More and more people (i.e. retail private investors) are trading the stock markets on the side. Leveraged derivatives, like Contract-For-Difference (CFD) are increasingly being used.
  2. More and more people believe that a big crash will happen one day.

For the first trend, that may explain the increase in volatility among the stock market, which in our opinion often does not exhibit the most rational of all behaviour. We believe one of the reasons is because of the widespread use of technical analysis. One popular idea among technical analysis is the concept of a ?support level,? whereby stock prices are expected to ?rest? on and rebound from. Traders often place their ?stop-losses? on the support level, which is the price level that they will sell their stocks in order to cut their losses. As the stock price rests on some traders? stop-loss levels, it triggered their stop-loss sales of their stocks. Such sales put downward pressure on the stock price, which may result in other stop-loss levels to be breached, which in turn triggered even more stop-loss sales. The outcome is a very steep and rapid fall in stocks prices. This outcome is an example of irrational and volatile market behaviour that is increasing in frequency. With easy availability of (1) leveraged instruments like CFDs, (2) instantaneous communications via the Internet and (3) automation of trading via computers at the hands of the common people (who are not trained to think like true investors), this effect becomes magnified even more.

For the second trend, it may be the consequence of the fact that the common people are beginning to understand and see the absurdities, excesses and greed in the financial systems. Unfortunately, even among those who believe that a crash is inevitable, they still have a substantial portion of the wealth in the stock market, either voluntarily through their side trading, or involuntarily through their superannuation. For some of these side traders, they may believe that it is all right as long as you know ?when? to get out of the stock market.

This is the scary part.

If you sincerely believe that a crash is inevitable, you have to understand these facts:

  1. You cannot know ?when? to get out. Crashes always take the majority by surprise. Otherwise, the majority would have gotten out long ago, which means it cannot be called a crash in the first place.
  2. By the time you know it is time to get out, chances are, everyone else does too.

What is the implication? The first trend, along with these facts implies that when a crash happens, it will be so extremely rapid that vast amount of paper wealth will vanish in seconds as the gigantic herd heads for the crowded exits simultaneously. Your chances of surviving a crash with your wealth intact is pretty much zero. Even scarier, since the vast majority of people have much of their accumulated wealth in the stock market through their superannuation, a crash will affect this vast majority, which is an unprecedented scale in all of human history.

Please bear in mind that we are not predicting a massive crash in the days ahead. We are highlighting the important point that if you sincerely believe that a crash is inevitable, the time to get out is NOW, which is the most rational thing to do. The ideas of (1) an inevitable crash and (2) staying in the stock market while the party is still on, are mutually incompatible. On the other hand, if this is not your belief, then you can pretty much ignore everything this article has to say.