When this ridiculous stock market implodes once more, strategists will be scampering to explain how some unexpected event caused losses that “no one could predict.” That of course will be just as false then as it was in 2000 and 2008. The below chart offers a reality check for anyone wishing to stay awake and ahead of the curve.
Data source see: Factset
If I had a fresh veg-smoothie for every “guru” I have heard hyperbolising about China and its “insatiable” demand for commodities and resources the past 8 years, I would be well nourished for the rest of my life. Hopelessly unrealistic and greed-blind, a great many people were predictably–dead wrong. See this excellent slideshow for a pictorial update on the massive real estate overbuild and credit crisis now plaguing China.
It is helpful to recognize that human behavior on credit steroids is consistent across borders and generations.
From 2003 to 2008, China’s growth was fueled by demand courtesy of the consumer debt bubble in the west (Greenspan’s Fed pushed rates to 1% after the dot-bomb and investment banks engineered and sold reckless debt with wild abandon). Since that bubble burst in the west, over the past 6 years, China’s growth has been driven by domestic debt-fueled spending, especially on real estate and transportation. See: Housing Trouble Grows in China
“If all the developers here stop building right now, there’s still enough apartments to last the local and migrant populations for another six to eight years,’ said a discouraged Changzhou sales agent.”
“Local developers say at least three large projects together totaling more than two dozen 20-story apartment buildings have been abandoned due to low sales and won’t be completed unless the city figures out a way to revive them.”
Once the frenzied bidding and building of a bubble ends, participants and economies are left drowning in debt. China is no exception. Next comes the long hangover of sluggish growth and low monetary velocity, where adding more non-productive debt to the banking system merely weighs down demand and the economy further. See: Giving credit for China’s slowdown
After the fever of credit mania, participants sober up en masse and start focusing on practical needs like food, sustainable energy, shelter, health and cash in pocket. No surprise then that gold is losing its luster. See: China is losing its taste for gold.
This gold statute of Mao Zedong, valued at about $16 million, at an exhibition last year in Shenzhen is a lasting testament to how unproductive and misdirected human aspirations have been over the past few years. Hopefully the pain of loss will leave a lasting memory in some for a few years to come. If that happens, then at least some of this foolish period will have been productive.
Thanks to a regular reader in the Netherlands who sent me this link tonight. It is worth watching. Now Senator Elizabeth Warren–then a commercial/bankruptcy professor at Harvard Law School–gave this lecture in 2007 on the trends behind rising bankruptcy and financial stress in the middle-class (“UC Berkeley Graduate Council Lectures”). As households continue to struggle under record debt levels in 2014, the socioeconomic trends outlined by Ms. Warren remain relevant in North America and beyond.
In order to rebuild the middle class, we need to first understand what ails it. Despite spending less today on food, clothing and appliances, Warren identifies 5 fixed costs that have surged since 1970: housing, healthcare, auto costs, child care and household taxes. She also explains why two income families today have less disposable income than one income families in 1970. They also face greater financial risk with much less buffer to absorb life’s shocks. This weakening of the middle class masses is a weakening of our entire economy. Here is a direct video link.
