He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest Spittle and Saliva Spray Upon Ye Face

Reggie Middleton's picture

 

Just the other day I stated "Why does everyone confuse a bubble with
economic progress" in a post about a very probable bubble in China (see
"It Doesn't Take a Genius to Figure Out How This Will End" then get your chuckles on with "Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!"). Well, as if on cue,  Stocks, Metals Decline Around World After China Curbs Lending; Yen Weakens:

Jan.
7 (Bloomberg) -- Stocks fell around the world, driving the MSCI
Emerging Markets Index down the most in three weeks, and metals
declined after China moved to curb lending. The yen dropped after
Japan’s new finance minister said he would welcome a weaker currency.

The MSCI emerging markets
gauge slipped 0.7 percent at 9:45 a.m. in London, led by China as the
Shanghai Composite Index plunged 1.9 percent, the biggest decline among
benchmark indexes tracked by Bloomberg. Futures on the Standard &
Poor’s 500 Index lost 0.3 percent. Copper retreated from a 16-month
high and oil snapped an 11-day rally. The yen weakened against all 16
most- traded currencies.

Central bankers in China, the engine of the global economic bubble
recovery, sold three-month bills at a higher interest rate for the
first time in 19 weeks after saying their 2010 focus is controlling
record loan growth. The Federal Reserve said in the minutes of its
latest meeting that the U.S. economic recovery might require additional
stimulus measures to be sustained.

Bubble Blowing Growth will probably reverse slow this year as tight credit will damp the artificially derived and probably outright lied about demand side,” said Zhang Ling,
who helps oversee $7.2 billion at ICBC Credit Suisse Asset Management
Co. in Beijing. “That will dash investors’ hope of another year of fast
bubble blowing growth.”

Why would China want to raise rates? Well from the afore-linked post:

 Some local officials are even building towns from scratch in the desert, certain that demand won’t flag. Straight out of the Dubai make money now and pay for it later handbook of bubblistic speculation! And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further. Imported speculators from Miami, LA and downtown Brooklyn!

And jump they have. In Shanghai, prices
for high-end real estate were up 54 percent through September, to $500
per square foot. In November alone, housing prices in 70 major cities
rose 5.7 percent, while housing starts nationwide rose a staggering 194
percent. The real estate rush is fueling fears of a bubble that could
burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments.
Let's get this straight. "Fears of a bubble"!!! A 54% gain in 9 months
does not confirm a bubble???!! What is the long term historical average
in China. Probably 2% to 4% annually, or on pace with inflation, give
or take. So, if pundits are not sure a 25x increase is a bubble, what
would it take to convince them?

...

“Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly.” He pledged a crackdown on speculators.
Actually, once the bubble pops, their economic growth will collapse,
and trend in reverse. That's what happens when bubbles pop. If the
growth just stopped, then it would make sense to encourage bubbles,
wouldn't it? You can just reignite another bubble when the previous one
pops and start the cycle over again. It appears as if this is the
playbook some of our central bankers are following. Unfortunately, they
are called boom/bust cycles, not boom/stop cycles. Bubbles are not
indicative or true organic growth, they are a sign of growth borrowed
from future time periods that MUST be paid back with hard money
interest. The bigger the bubble, the bigger the "vig".

Although
parallels with other bubble markets, the China bubble is not quite so
easy to understand. In some places, demand for upper middle class
housing is so hot it can’t be satisfied. In others, speculators keep
driving up prices for land, luxury apartments, and villas even though
local rents are actually dropping because tenants are scarce. What’s
clear is that the bubble is inflating at the rich end, while little
low- cost housing gets built for middle and low-income Chinese.This is not hard to parallel. This is exactly what happened in NYC, particularly Manhattan and Downtown Brooklyn. See  "Who are ya gonna believe, the pundits or your lying eyes?" (for pictures) and "Who are you going to believe, the pundits or your lying eyes, part 2" (for numbers and a very shaky video),
I illustrated a trip from Chelsea Piers in Manhattan to Prospect Park
in Brooklyn, capturing the rampant supply of residential, office and
commercial space that is STILL being put up despite the extreme glut
currently in this rapidly declining market. As you look through all of
this visual material, remember banks have supplied the capital for
building all of these empty edifices, at no less than 10x leverage.
None of this inventory was targeted at the middle and lower classes. As
ironic as it may sound, this activity ultimately ends up causing
downward social mobility as asset values collapse under mounting debt.
See Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke for my take on social mobility, downwards style).

In
Beijing’s Chaoyang district, which represents a third of all
residential property deals in the capital, homes now sell for an
average of almost $300 per square foot. That means a typical 1,000-square-foot apartment costs about 80 times the average annual income of the city’s residents. I'll give this until the end of 2010 to blow up!

...

Koyo Ozeki,
an analyst at U.S. investment manager Pimco, estimates that only 10
percent of residential sales in China are for the mass market.
Developers find the margins in high-end housing much fatter than
returns from building ordinary homes.

How did this
bubble get going? Low interest rates, official encouragement of bank
lending, and then Beijing’s half-trillion- dollar stimulus plan all
made funds readily available. City and provincial governments have been
gladly cooperating with developers: Economists estimate that half of
all local government revenue comes from selling state-owned land. "Nuff said!

Chinese consumers, fearing inflation
will return and outstrip the tiny interest they earn on their savings,
have pursued property ever more aggressively. Companies in the
chemical, steel, textile, and shoe industries have started up property
divisions too: The chance of a quick return is much higher than in
their primary business. Oh my!

Built on Sand

“When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land,” says Andy Xie,
an independent economist who once worked in Hong Kong as Morgan
Stanley’s top Asia analyst. “No one talks about their factories making
money these days.”

Like I said in the original post, " "It Doesn't Take a Genius to Figure Out How This Will End". See the following for my historical opinion on the subject: China Macro Update, (also of interest is the HSBC opinion and 2H08 update).Then My view of the China hype bears additional fruit and All of my warnings about China are starting to look rather prescient.