Anyone who isn't familiar, Nouriel Roubini hit his first home run in Q3 2006 when he forecasted the housing bust in the United States. Since then, he's been called Dr. Doom for being correct when others were so wrong. Lately, however, he has been on the wrong side of the trade as markets have been rallying for two years.
Unfortunately, people have a tendency to ignore you if you've been wrong for two years straight. What is he saying these days and why do I sort of agree with him?
China is rife with over investment in physical capital, infrastructure and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns and brand-new aluminium smelters kept closed to prevent global prices from plunging.
Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990s – have ended with a financial crisis and/or a long period of slow growth.
2013? Really? I don't think it's that far off. In my opinion, back in 2008, if China wouldn't have ignited the fire of its economy through excessive stimulus, China would be experiencing GDP decline over the last two years. It's for this reason that contrary to popular opinion, I believe that perhaps the yuan is overvalued. That said, I realize that for the most part, my opinion doesn't matter. China is a "supply and command" economy.
At the current time, however, China is reigning in on speculation. Some toes are going to be stepped on. I'd personally hate to have any exposure to real estate prices in China. Meanwhile, officials in China are trying to anticipate a hard landing by probing banks to see what would happen if prices dropped 50%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.