Affects Of A China Real Estate Crash [View article]
There's one argument in favor of developing nations - the jobs are there. It's really that simple. It's Marxism at its finest, capital going to where costs are marginalized to the greatest extent possible. Once these places develop, the developed world will become competitive again, but not until then.
This is the crucial difference between any comparison between the US and China, and why it is entirely conceivable that what happened in the US (job stagnation, asset price stagnation, wage and GDP stagnation) will probably happen to a lesser extent in China.
JC51,
You're right that China has a lot less income stability than Japan - this works in China's favor...their wages are rising at such a fast clip that it can indeed justify a much more pronounced asset price inflation.
Affects Of A China Real Estate Crash [View article]
"Well, they need to grow much faster. Real estate prices have risen 150% over the past 7 years. Wages haven't kept up."
Are you certain wages have not kept up?
http://onforb.es/HOgiWb "An average annual 14% rise in wages in the country during the past decade is likely to “maintain the same pace for the next 5-10 years...”
That comes out to exactly 150% over 7 years.
"At the peak of the real estate bubble in the US, the price to income ratio in San Francisco was 7.5:1."
I think you missed my point about the city comparisons. I'm acknowledging that the numbers are smaller in the US, but I am giving potential insight as to why this may be the case. Essentially, if you consider these metropolises to have a significant foreign sentiment effect on real estate values, then the sentiment effects will be lopsidedly in favor of the US, i.e. their rich can create a much larger effect on Chinese real estate prices than vice versa.
There are also questions about your methodology. Sure in Vegas the number may have been 5 to 1, but just because Vegas is now the foreclosure capital of America doesn't mean that it had the highest instance of this number. Average prices in San Jose still hover around $600,000, close to 10 to 1, and this is after some modest depreciation.
"Japan's real estate crash in 1990 shows that this argument can only go so far."
Well, I certainly have my own viewpoints on what happened in Japan, but their crash was in no small degree caused by the massive currency appreciation that resulted from the Plaza Accords.
"There's one BIG difference. In the US we have the right to report or investigate any discrepancies in those numbers."
This is a good point. However, I think in the US we have this right because we can afford to do so. Freedom is not free.
Affects Of A China Real Estate Crash [View article]
1) Someone else made the point that incomes are rising much faster in China than in the US.
2) I'd compare such ratios to other countries in the region first (minus Australia and New Zealand), before comparing them to the US. More importantly, I'd also compare the ratios of these other countries to their respective periods in their development cycles.
3) In the US, there's more land than the people can use. In east Asia, you generally have the opposite problem.
4) In both the US and in China (and indeed any other country in the world), governments tell their people what they want them to hear.
5) About your statistics, if I understand you correctly, you are saying that in Beijing and Shanghai, the price to income ratio is that of those cities compared to per capita incomes in China. Well, you have to realize that these cities are global metropolises that may be subject to a good amount of skewing by rich international expats. You can use the same argument for San Francisco and New York, but this phenomenon would serve to deflate prices in those regions, as no other country is as wealthy as the US, and on average the rich in other nations cannot compare to the rich in the US.
Bottom line, I think a straight US-China comparison, while natural for Americans, is comparing apples to oranges.
Affects Of A China Real Estate Crash [View article]
"I could have bought a 1800 sq. ft. home 20 minutes outside of Miami in 2005 (height of the real estate bubble) for $60,000. It doesn't mean anything. "
You can (still) also buy a 1800 sq. ft. home in many parts of California for upwards of $600,000 - just normal, average suburban neighborhoods, nothing fancy, nothing special. I think you are on to something that these prices may not mean anything, and that anyone talking about an impending Chinese RE bubble/collapse without skin in the game is not really adding much to the conversation.
Another way to look at gold is to ask yourself whether or not money can be over- or under-valued. If the dollar in relation to gold is overvalued, then it makes sense to short the dollar/treasuries, and overweight gold.
Regarding the lending and interest argument, you can also add the inflation/deflation argument. In this sense, gold and fiat work in opposite directions - in (monetary) inflation, fiat loses value while gold gains value, and in (non-catastrophic) deflation the opposite occurs. Of course if the amount of gold mined from the earth increased exponentially without a concomitant increase in economic activity, you would have gold inflation, and it would lose value.
In this sense, gold is just like anything else. It serves a use, and if it is over or undervalued regarding this use, it will be seen as a good or bad investment.
Affects Of A China Real Estate Crash [View article]
Some observations:
1) Apparently how real estate in China is valued is how it is valued in most of the region - I would not be at all surprised if numbers for Japan, Singapore, South Korea, Taiwan, Malaysia, etc, reflected more the China phenomenon than the US phenomenon, and that for those countries the phenomenon would be much more pervasive throughout the last 50 years and would reflect where they were in the development cycle. For example, in Korea they have been dealing with this problem for at least 10, maybe 20 years now. Still no signs of an imminent property collapse there, even though they show the same signs. What has happened there is that incomes have risen dramatically, which is probably also what will happen in China.
2) In China the mortgage industry is underdeveloped, so many buyers pay by cash. Mortgage concerns are less of a concern there, as is true in much of the region (not sure about Australia and New Zealand).
3) Also, there is a large stigma against renting in the region, which decreases demand for rental units to a much larger extent than in the US. Price to rent is out of whack not necessarily solely because of a speculative frenzy, but also because of demand factors as well. It may also reflect a historical reality there.
4) There are some parts of the US that also have RE price-to-income ratios well above 10, and in some cases (San Jose) approaching 20. Coincidentally most of these places are along the coast, and many along the pacific coast.
As always your articles are thought provoking, thanks.
I applied a crude and inarticulate version of this analysis a while back when I went into etrade. I still don't have a good idea on any company-specific issues that may be holding it back. Earnings-wise It has preformed better than expected and is well on its path to profitability - its write-offs have shrunk significantly.
All I can figure is that with guys like Corzine still on the news, and with BofA, Wells, and Citi still making headlines (and where is AIG, Fannie and Freddie?), no one is really going to take financials seriously for the foreseeable future. People will easily forget all this if/when boom times come, but I fear they will occur somewhere outside the developed world.
China Admits Its Growth Problem Is Sparking Social Unrest [View article]
I think most countries take strong economic growth for granted. Reference Greece. Reference Japan before and after the late 80s - how many prime ministers have they gone through? Take out Koizumi, and you have a political basket-case there.
My point still stands. Too many people consider China to be some sort of otherworldly malicious force, one they hope to see crumble under the ashes of history. Too many people project their own fears upon this force. To use your statement as an example, I would hate to see what would happen in the US if we experienced any sort of deflation or lack of "hope of future wealth".
We can carry this case of projection further:
"I agree that an economic slowdown will expose the cracks in their economy."
Reference 2008 in America.
"The Chinese people are sick of not having a voice, and the government has been slow to give them one. "
Do you think there will ever be an official law that formally declares that something will be confiscated? For gold, you were once allowed to own it, and then during that time period, if you did own it, you had to get rid of it. Only the government was allowed to hold it. The government forced you to sell your gold to them at the price they dictated. This is confiscation. It may not have been rigorously enforced, but the law of the land prohibited you from owning gold, even though it was in the years prior legal tender and thus widely circulated.
Jim Rogers says the hit that stocks took today over concerns of an economic slowdown in China is actually a good thing. “I’m delighted to see it,” Rogers says. “They need to do that. It’ll be good for China, it’ll be good for the world, and it will present opportunities for all of us. I hope that the Chinese market collapses so I can buy Chinese shares.” [View news story]
"Not necessarily. When Japan's economy hit a brick wall back in 1989-90, the US kept churning along."
There are structural differences in how international economics work now as opposed to how they worked in the 80s. Back in the 80s, one could still see "Made in America" commercials and how local product was indeed local product. Today, the globalization revolution that took off in the 90s has resulted in an incredibly integrated world economy.
Today, most of what is considered "American" is branding and design. The actual assembly and manufacturing is done overseas, in places like China, Mexico, and SE Asia. In Japan, which has also experienced this phenomenon, they call it the "hollowing out" effect, one they have been subject to almost exactly when they hit your proverbial "brick wall". They were forced (by the West) to dramatically appreciate their currency, which made their export-oriented economy less competitive. This resulted in relocating factories (and thus formerly Japanese jobs) to other locales, including the US.
One other factor regarding Japan is that it simply isn't that big. If China had only half the per capita income of developed nations, then a collapse in China would be equivalent to the collapse of both America and Europe combined. When Japan hit its "brick wall", its per capita income was as high, if not higher, than most other developed nations - yet because of its relatively small size, it simply did not matter that much.
Labor markets are now global whereas before they were still regional. If China collapses, it will be because demand for manufactured goods of all types around the world have also collapsed. This means that a collapse in China will occur BECAUSE OF lack of demand in developed nations, their primary customers, and not vice versa. Much of China's economy is a derivative of others.
Is Xinyuan Real Estate The World's Cheapest Stock? [View article]
"Nonetheless, what I believe this article hints at - if not explicitly outlines - is that, while there may indeed be a risk of fraud, that nominal risk is greatly outweighed by the considerable upside potential. "
There's a lot of ways to look at risk.
There's the Buffett method, which essentially boils down to risk being not knowing what you're doing.
There's also all sorts of quantifiable models that seek to measure risk vs. reward, like the spreads at Vegas or the horse track.
For me, I don't live in China, I don't own Chinese real estate, and I don't know anyone that knows this company, nor am I exposed to it in any other way than investment literature. I also do not know how to quantify % risk of fraud. I am curious about how you reached the conclusion that "nominal risk is greatly outweighed by the considerable upside potential". I would also ask if you have weighed the downside potential.
Finally, I would ask you why people who live in China and own Chinese real estate need to go to the NYSE to invest in this company, and not a Chinese stock exchange. You can give reasons that doubt the integrity of Chinese stock markets, but this then begins to look like an argument that plays on American fears and prejudices than any sound investment decision. Also, if you doubt the integrity of Chinese stock markets, auditors, government watchdog agencies and what not, what are you doing giving sterling endorsements to and investing in Chinese companies? Because Ernst and Young said so? Because of the NYSE listing?
"Yes contrary to the lies in the media, falling prices cause people to buy more. "
The problem with this argument lies in how deflation works. People buy more in inflationary environments because they can take on more debt to do so. In deflationary environments, the rising value of debt chokes off potential purchases, even at fire sale prices. This is almost exactly what is going on in the property market.
Affects Of A China Real Estate Crash [View article]
This is the crucial difference between any comparison between the US and China, and why it is entirely conceivable that what happened in the US (job stagnation, asset price stagnation, wage and GDP stagnation) will probably happen to a lesser extent in China.
JC51,
You're right that China has a lot less income stability than Japan - this works in China's favor...their wages are rising at such a fast clip that it can indeed justify a much more pronounced asset price inflation.
Affects Of A China Real Estate Crash [View article]
Are you certain wages have not kept up?
http://onforb.es/HOgiWb
"An average annual 14% rise in wages in the country during the past decade is likely to “maintain the same pace for the next 5-10 years...”
That comes out to exactly 150% over 7 years.
"At the peak of the real estate bubble in the US, the price to income ratio in San Francisco was 7.5:1."
I think you missed my point about the city comparisons. I'm acknowledging that the numbers are smaller in the US, but I am giving potential insight as to why this may be the case. Essentially, if you consider these metropolises to have a significant foreign sentiment effect on real estate values, then the sentiment effects will be lopsidedly in favor of the US, i.e. their rich can create a much larger effect on Chinese real estate prices than vice versa.
There are also questions about your methodology. Sure in Vegas the number may have been 5 to 1, but just because Vegas is now the foreclosure capital of America doesn't mean that it had the highest instance of this number. Average prices in San Jose still hover around $600,000, close to 10 to 1, and this is after some modest depreciation.
"Japan's real estate crash in 1990 shows that this argument can only go so far."
Well, I certainly have my own viewpoints on what happened in Japan, but their crash was in no small degree caused by the massive currency appreciation that resulted from the Plaza Accords.
"There's one BIG difference. In the US we have the right to report or investigate any discrepancies in those numbers."
This is a good point. However, I think in the US we have this right because we can afford to do so. Freedom is not free.
Affects Of A China Real Estate Crash [View article]
2) I'd compare such ratios to other countries in the region first (minus Australia and New Zealand), before comparing them to the US. More importantly, I'd also compare the ratios of these other countries to their respective periods in their development cycles.
3) In the US, there's more land than the people can use. In east Asia, you generally have the opposite problem.
4) In both the US and in China (and indeed any other country in the world), governments tell their people what they want them to hear.
5) About your statistics, if I understand you correctly, you are saying that in Beijing and Shanghai, the price to income ratio is that of those cities compared to per capita incomes in China. Well, you have to realize that these cities are global metropolises that may be subject to a good amount of skewing by rich international expats. You can use the same argument for San Francisco and New York, but this phenomenon would serve to deflate prices in those regions, as no other country is as wealthy as the US, and on average the rich in other nations cannot compare to the rich in the US.
Bottom line, I think a straight US-China comparison, while natural for Americans, is comparing apples to oranges.
Affects Of A China Real Estate Crash [View article]
You can (still) also buy a 1800 sq. ft. home in many parts of California for upwards of $600,000 - just normal, average suburban neighborhoods, nothing fancy, nothing special. I think you are on to something that these prices may not mean anything, and that anyone talking about an impending Chinese RE bubble/collapse without skin in the game is not really adding much to the conversation.
Affects Of A China Real Estate Crash [View article]
This is fortunate because less than 1% of the Chinese population live in Shanghai.
Is Gold Ever An Investment? [View article]
Regarding the lending and interest argument, you can also add the inflation/deflation argument. In this sense, gold and fiat work in opposite directions - in (monetary) inflation, fiat loses value while gold gains value, and in (non-catastrophic) deflation the opposite occurs. Of course if the amount of gold mined from the earth increased exponentially without a concomitant increase in economic activity, you would have gold inflation, and it would lose value.
In this sense, gold is just like anything else. It serves a use, and if it is over or undervalued regarding this use, it will be seen as a good or bad investment.
Affects Of A China Real Estate Crash [View article]
1) Apparently how real estate in China is valued is how it is valued in most of the region - I would not be at all surprised if numbers for Japan, Singapore, South Korea, Taiwan, Malaysia, etc, reflected more the China phenomenon than the US phenomenon, and that for those countries the phenomenon would be much more pervasive throughout the last 50 years and would reflect where they were in the development cycle. For example, in Korea they have been dealing with this problem for at least 10, maybe 20 years now. Still no signs of an imminent property collapse there, even though they show the same signs. What has happened there is that incomes have risen dramatically, which is probably also what will happen in China.
2) In China the mortgage industry is underdeveloped, so many buyers pay by cash. Mortgage concerns are less of a concern there, as is true in much of the region (not sure about Australia and New Zealand).
3) Also, there is a large stigma against renting in the region, which decreases demand for rental units to a much larger extent than in the US. Price to rent is out of whack not necessarily solely because of a speculative frenzy, but also because of demand factors as well. It may also reflect a historical reality there.
4) There are some parts of the US that also have RE price-to-income ratios well above 10, and in some cases (San Jose) approaching 20. Coincidentally most of these places are along the coast, and many along the pacific coast.
As always your articles are thought provoking, thanks.
Sectors Poised To Outperform [View article]
I applied a crude and inarticulate version of this analysis a while back when I went into etrade. I still don't have a good idea on any company-specific issues that may be holding it back. Earnings-wise It has preformed better than expected and is well on its path to profitability - its write-offs have shrunk significantly.
All I can figure is that with guys like Corzine still on the news, and with BofA, Wells, and Citi still making headlines (and where is AIG, Fannie and Freddie?), no one is really going to take financials seriously for the foreseeable future. People will easily forget all this if/when boom times come, but I fear they will occur somewhere outside the developed world.
China Admits Its Growth Problem Is Sparking Social Unrest [View article]
My point still stands. Too many people consider China to be some sort of otherworldly malicious force, one they hope to see crumble under the ashes of history. Too many people project their own fears upon this force. To use your statement as an example, I would hate to see what would happen in the US if we experienced any sort of deflation or lack of "hope of future wealth".
We can carry this case of projection further:
"I agree that an economic slowdown will expose the cracks in their economy."
Reference 2008 in America.
"The Chinese people are sick of not having a voice, and the government has been slow to give them one. "
Reference Occupy.
China Admits Its Growth Problem Is Sparking Social Unrest [View article]
Substitute the word "China" with any nation, entity, or individual, and you will find that this is not some sort of unique condition to China.
Death Of The Gold Bull Market? [View article]
Death Of The Gold Bull Market? [View article]
Jim Rogers says the hit that stocks took today over concerns of an economic slowdown in China is actually a good thing. “I’m delighted to see it,” Rogers says. “They need to do that. It’ll be good for China, it’ll be good for the world, and it will present opportunities for all of us. I hope that the Chinese market collapses so I can buy Chinese shares.” [View news story]
There are structural differences in how international economics work now as opposed to how they worked in the 80s. Back in the 80s, one could still see "Made in America" commercials and how local product was indeed local product. Today, the globalization revolution that took off in the 90s has resulted in an incredibly integrated world economy.
Today, most of what is considered "American" is branding and design. The actual assembly and manufacturing is done overseas, in places like China, Mexico, and SE Asia. In Japan, which has also experienced this phenomenon, they call it the "hollowing out" effect, one they have been subject to almost exactly when they hit your proverbial "brick wall". They were forced (by the West) to dramatically appreciate their currency, which made their export-oriented economy less competitive. This resulted in relocating factories (and thus formerly Japanese jobs) to other locales, including the US.
One other factor regarding Japan is that it simply isn't that big. If China had only half the per capita income of developed nations, then a collapse in China would be equivalent to the collapse of both America and Europe combined. When Japan hit its "brick wall", its per capita income was as high, if not higher, than most other developed nations - yet because of its relatively small size, it simply did not matter that much.
Labor markets are now global whereas before they were still regional. If China collapses, it will be because demand for manufactured goods of all types around the world have also collapsed. This means that a collapse in China will occur BECAUSE OF lack of demand in developed nations, their primary customers, and not vice versa. Much of China's economy is a derivative of others.
Is Xinyuan Real Estate The World's Cheapest Stock? [View article]
There's a lot of ways to look at risk.
There's the Buffett method, which essentially boils down to risk being not knowing what you're doing.
There's also all sorts of quantifiable models that seek to measure risk vs. reward, like the spreads at Vegas or the horse track.
For me, I don't live in China, I don't own Chinese real estate, and I don't know anyone that knows this company, nor am I exposed to it in any other way than investment literature. I also do not know how to quantify % risk of fraud. I am curious about how you reached the conclusion that "nominal risk is greatly outweighed by the considerable upside potential". I would also ask if you have weighed the downside potential.
Finally, I would ask you why people who live in China and own Chinese real estate need to go to the NYSE to invest in this company, and not a Chinese stock exchange. You can give reasons that doubt the integrity of Chinese stock markets, but this then begins to look like an argument that plays on American fears and prejudices than any sound investment decision. Also, if you doubt the integrity of Chinese stock markets, auditors, government watchdog agencies and what not, what are you doing giving sterling endorsements to and investing in Chinese companies? Because Ernst and Young said so? Because of the NYSE listing?
Death Of The Gold Bull Market? [View article]
The problem with this argument lies in how deflation works. People buy more in inflationary environments because they can take on more debt to do so. In deflationary environments, the rising value of debt chokes off potential purchases, even at fire sale prices. This is almost exactly what is going on in the property market.