Originally published August 27, 2018
I simply don't trust the fundamentals of the global economy right now. The system is built on quicksand.
Debt is growing globally and governments are running huge deficits while interest rates are still incredibly low. Looking at almost any metric, stock markets have been more expensive once in the last 100 years - just before the dot-com bubble burst. There is also another risk in a category of its own: China.
A recent Bloomberg report on Chinese real estate noted that from June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings Ltd., rose 31% to almost $202 per square foot. That's 38% higher than the median price per square foot in the U.S., where per-capita income is more than 700% greater than in China.
This China story gets more interesting. Most of these apartments are sitting empty because they are purchased as investments. Rental yields in China are 1.5%, while the cost of borrowing (mortgage cost) is around 5%-6%. Chinese consumer debt-to-GDP is much greater than it was in the U.S. during the 2008-09 financial crisis.
Since household real estate lending is 22% of Chinese banks' assets, if you are the almighty Chinese government, you have a decision to make: Do you let real estate prices normalize (decline) and then suddenly discover that your financial institutions are bankrupt, or do you allow (and actually support) the inflation of housing prices?
Predictably, as the Bloomberg report relates: China is ramping up development, and rather than curtail leverage, banks are jumping into the speculative real-estate bubble: mortgage growth is now at 20%.
Which brings me to one of my all-time favorite books, "Margin of Safety," by investing legend Seth Klarman, who writes:
There is the old story about the
