Today, China posted an impressive 7.9% GDP growth in the 3 months to June 2009. The most commonly accepted reasons for such a rapid revival in growth are:
- 4 trillion yuan stimulus package
- Relaxation of lending standards for banks
No doubt, this gives the markets plenty of reasons to be optimistic about the world economy. Economic figures for housing and autos seem to point to a strong recovery in China. Yet on the other hand, there are many other contradictory economic signals as well. For example, Chinese exports are falling for 8 months straight (see China’s exports sink 21%). Consumer prices fell 1.7% in June (see China’s June CPI falls 1.7%). Producer prices fell 7.8% in June (see China’s PPI falls 7.8% in June).
The biggest concern we have for China right now is the surging growth in lending. Take a look at China’s lending growth over the past 3 years:
As you can see, bank lending in China surged in 2009. As the Chines economy slowed significantly, it is very likely that private demand for debt will decline significantly too. What do you think will happen if the Chinese government force feed even more credit into the economy? Chances are, a lot of these credit will leak into speculations, unproductive projects and mal-investments.
This is a recipe for exploding amount of bad debts in the near future.
lol what in 60 years time?
This is silly, we expanded credit for decades before it became a problem. China’s savings rate is one of the best in the world.
Anon:
It’s the rate of increase of credit (at a time when the economy is slowing) that is the issue, not just the increase.
If you bother to know a little bit of recent history at all, China’s high savings rate did not prevent the banking system’s bad debt problems in the last decade. Same for Japan in the 1990s when their debt bubble burst.
They were interviewing a few Chinese locals on the news and most of them are quite optimistic about the economy. House wives are saying deflation is good for them because it reduces prices (to the contrary of mainstream economists who believe deflation is a BAD BAD thing) and to investors who are hoping their investments to double back in a few months. (yes, there was one guy who say that)
If that is not a sign of another bubble, then tell me what is.
But then their bubble could last longer than one would stay “solvent”. You will never know the Chinese government will continue to spend their reserve to “stimulate” the economy, and stimulate the rest of the world at the same time with green shoots popping up everywhere again.
China is basically where america was in the 1900’s. I dont why we are worried about credit increases.
Even if China was to have a debt crisis this would not change the longterm fundamentals of lending in China. People have savings, people can still borrow. Chinese wages will be rising over time – unlike in Australia where everyone is in debt to its eyeballs.
Japans debt bubble burst primarily due to its aging demographics and mature economy – infact Japan is on my radar at the moment. Japan will play a huge role in the Robotics industry as populations peak and productivity falls worldwide in the coming decades.
Anon:
Sure, long term wise, assuming no Black Swans, China will do very well. But in the interim, bad stuffs can happen. Sure, you can invest in American stocks in 1929, confident that by many decades time, America will be a wealthy superpower. Back in 1929, America had high savings rate.
Take a look at China’s private debt size at here
Cheers I will go and read that now.
Kerr Neilson agrees with some of what you said here- some of the speculation from lax credit controls recently in China.
However, I still remain bullish on China longterm!
On another topic, the margin of safety on alot of investments in the Australian market are 400-500% over bank interest atm. That is just unbelievable.
Hi Anon!
We agree with you on the long-term prospects of China. See What the commodities super-cycle is and isn’t?.
Anon:
Without deliberately taking this out of your intended context, do you really believe this?
Whilst there are obvious technoligical, political and trade changes since that time, there are two major difference between the US and China:
Cost and availability of energy and technological advantage.
I’ll explain them if you want me to, but I think most of us can see the problem with the comparison.
Also there is a huge difference in the ‘global’ economy of the time of the US in the 1900’s and today. By that I am talking about how money works, how trade works and who the players are. Huge difference.
I don’t see a rosy future for China or any other country that is basing its economy on 1) growth 2) industry and 3) exports. Peak oil is here, which means oil and energy in general will start to go through its death spiral of alternating high price with demand destruction and low price then higher price then more demand destruction.
Even if the world can somehow continue to find enough oil to replace the 20 mbd that are leaving world oil production as Cantrell and North Sea and others dry up, that still leaves no room for growth, and because new sources are more energy intensive prices will have to rise to reflect that. Growth requires cheap oil/energy. Industry requires cheap oil/energy. Exports require cheap oil/energy.
These problems are there on the demand side and the supply side. So even if China some how positions itself well, who is the market to buy Chinese products? The bankrupt western economies, where everyone is in debt up to there eyeballs? Imagine the world the US found itself in in 1900, the only capitalist country that had basically unlimited resources and room for growth and a growing world to sell to. Is that the world China is in now? Not by a long shot.
But China isn’t like the US in 1900, it is facing the mother of all water shortages (like the rest of Asia) as the big glaciers in the Himalayas disappear, there goes the rivers that 1 in 3 people in the world live next to and depend on. There are other significant environmental problems that will take a toll on health and productivity. There is also the problem of social unrest in China, that currently is bought off with 8% or more growth a year. How long can that continue in the context of the Energy Crisis, Environmental Crisis, and World Economic Crisis?
China might be a fine place to gamble for a year or two, but invest? I don’t see a single traditional investment doing well over the next few years, not real estate, not equities, not bonds, not currency. Gold and Silver might be okay for insurance purposes, but I wouldn’t call them investments. Oil will be good to trade if you can time it right, but not as an investment.
Maybe the problems I mentioned will prove fictitious, or some bright kids will find solutions, and the happy motoring future will arrive somehow, but unless you have a crystal ball that can tell me how, I don’t see all these problems disappearing and I don’t see how their consequences can be avoided, for China and the rest of the world, but I’m taking a longer term view measured in seasons instead of daily stock prices. There is plenty of money to be made in the context I describe, just don’t be holding it when the fiat system comes crashing down.
Wow great post David, I agree completely
Thanks Pete. I liked your posts too.
Good post, Temjin, David, Pete & Anon!
Yes, Peak Oil is a serious problem (see The Problem that can throw us back into the age of horse-drawn carriages). If the world cannot secure supplies of cheap energy, then the next generation faces a bleaker future than this generation.
We believe oil usage cannot be totally eliminated, but can be gradually phased out into a plethora of alternative energy implementations, some of which are good ideas and some not so good. That is, as we wrote before in Smart money in alternative energy—Part 2: the solution or solutions configuration?,
Chances, if the world’s future energy problem is to be solved effectively, it will be in the form of distributed energy system (see Smart money in alternative energy—Part 3: centralised or distributed power?.
I agree with David to an extent. Peak Oil is a problem but I do agree with the editor in that we will get through this and a phase out into alternative energies etc. However if the car industry is an indication the transition period might be abit rocky.
Although, these problems are very much real and unavoidable, I am very much a contrarian investor and way too many people are going on about peak oil. Buffet has sold his oil holdings and if you look at alot of funds some have reduced and/or sold their oil holdings. In fact I am bullish airlines because the margin of safety is so rediculous that I can buy an airline on a pe of 4 or 5 at well below its NTA – no doubt because people have “overshot” on the peak oil doomsday speak. Clearly regardless of peak oil retiring baby boomers will help airlines in the longterm as they go on more holidays etc.
Unfortunately we dont know what will happen when peak oils ramifications fully take place and we are forced into a transitional period into the new economy. I dont reckon anyone thought oil would have gone to $30 a barrel – I know i didnt!
“China might be a fine place to gamble for a year or two, but invest? I don’t see a single traditional investment doing well over the next few years, not real estate, not equities, not bonds, not currency. Gold and Silver might be okay for insurance purposes, but I wouldn’t call them investments. Oil will be good to trade if you can time it right, but not as an investment.”
Any investment is good enough if the margin of safety is large enough! If you are uncertain increase the margin of safety.
You guys should read stuff by Mike Stathis. He is very detailed (sometimes too detailed!) and has his own newsletter. His monthly newsletters are sometimes 46 pages long lol *sigh*.
He used to work as an investment banker for high net worth clients and saw this crisis coming in 2005-6.
His book “Americas Financial Apocolypse” written in 2006 is a good read and saved me from lots of financial disasters in this downturn.
Probably the single best book I’ve ever bght – well almost as good as intelligent investor – I cant diss Graham
Anyways he asked his loyal readers to spread the word because he is relatively new and doesn’t want to pimp himself like the others do. If anything he hates the media!
http://www.avaresearch.com/article_details-185.html
stop screening our messages lol
Hi Anon!
Somehow, your comments are always put into the moderation queue. Don’t know why. Maybe “anon” is marked by Akismet spam filter?
Quoted From David:
“But China isn’t like the US in 1900, it is facing the mother of all water shortages (like the rest of Asia) as the big glaciers in the Himalayas disappear, there goes the rivers that 1 in 3 people in the world live next to and depend on.”
Looks like Jim Rogers is buying water companies in China and India:
“While Rogers is bullish on agriculture and commodities in general, he is also bullish on select sectors in emerging markets too. Specifically, he has focused on water treatment. He notes China and India’s water problems and he has bought water companies in China. He did not cite specific names, but we do know that Heckmann (HEK) has had a large presence regarding water in China, even if it is not right along the lines of what Rogers is referring to. He says that the Chinese are aware of their problem and are spending “hundreds of billions” to solve their agricultural problem. So, his bets on water treatment and agriculture are tied together.”
Anon:
Gee, you’d hardly know there was a GFC going on at all…
Excuse my sarcasm, but this touches on another subject altogether, which is whether PE’s can even be respected in this environment. CIJ has some articles on this topic, but I can’t remember which ones exactly.
That is a good point, but I refer to my point above. It is easy to say increase the margin of safety, but perhaps then you will be left with no viable investments at all – every investment has its risks, there are no ‘no risk’ investments that you can fall back onto if you are completely uncertain.
I just wanted to say thanks to everyone for being open and sharing with their ideas. Clearly we have “elders” in the room and I am the “joey” ! I’ve been reading alot of your posts/articles – very informative and i’m sure I will learn alot.
IMO, the key is more babies are being born and we can immigrate more people – we are not like Japan which was obviously screwed. There is going to be a dynamic shift of wealth to the resource rich countries – the ones that produce things.
Regarding pe’s, I personally think that it depends what industry you are in. You cant have hard and fast rules for everything. Finance companies obviously will be in a prolonged bear market, however if I could buy a finance company at 10-20 percent of bookvalue then it becomes a good investment (after due diligence of course). Perhaps a buy and hold strategy may not work in that scenario and you might have to sell it for 3-5 years or when it passes its intrinsic value. Buffet himself has recently bght investments in rail that he said publicly would be a hold for approximately 5 years.
I guess the key in this market is to adapt and not be set with your ideals and perceptions. When you see mispricing act and not follow all the negativity.
I remember Peter lynch mentioned Pe’s that were low at the top of the bull market was a time to exit.
Peter lynch said recently in an interview in 09:
“This dramatic decline in stock prices has affected great companies and good companies and mediocre companies. It’s brought them all down. Bargains are all over the place. There are so many attractive stocks out there. But they keep going down. I’ve definitely been pounded. To use a golf analogy, I’d like to take a couple of mulligans
“I would not disagree that corporate bonds look attractive versus money markets. But I would think stocks are more attractive. But you have to have a time horizon further out than three weeks from Wednesday. Even one year, two years is not long enough. I’m very happy and content that five, 10, 15 years from now, corporate profits will be higher and the stock market will be a lot higher. ”
“We’ve had 11 recessions since World War II and we’ve had a perfect score — 11 recoveries. There are a lot of natural cushions in the economy now that weren’t there in the 1930s. They keep things from getting out of control. ”
So 11 downturns and 11 recoveries! I would think betting on further calamities is almost gambling when history shows you this. Trust Peter to mention the obvious!
May I not be pecked to death by swans!
Its weird in a bull market everyone wants to buy but in a bear market everyone freezes up everytime, every bull market saying this time its different! In the 1990’s and 2000s everyone was waiting for a depression to occur.
If I had to have my crystal ball in operation I would go with Stathis. 2015-2017 is his prediction of a depression – not that crystal balls work lol.
Hi everyone!
During one of Marc Faber’s market commentary/interview, he mentioned that people was surprised that he was ‘bullish’ in stocks. He observed that a lot of investors are refusing to buy into the rally because there’s no good fundamental reasons to invest in stocks. Marc Faber replied, “But printing money is a fundamental reason.”
In other words, Marc Faber sees a hyperinflation environment in which other than gold/silver, stock prices will be sky-rocketing as well.
That’s the same reason why Meredith Whitney, a notable bearish stock analyst recently switched Goldman Sach into positive recommendation, which sparked a big rally (see The analyst who sparked a billion dollar rally). She said that the positive rating is rooted on her negative views of the economy, which would benefit Goldman Sach. The stock market, took that ‘bullish’ switch in recommendation and rallied.
Another analyst, Satyajit Das, a derivative expert, has the view that if this current rally is the beginning of a return to the boom years of prosperity, high inflation will return. He do not believe that price inflation is likely to be a problem now.
In other words, eventually there will be recovery from the GFC. But unlike the past recovery, we will likely see a dark side to this recovery- very high inflation. For the stock investor, this means you better be sure that the business that you invest in can have its profits raised by the rising tide of price and monetary inflation i.e. benefit from inflation.
Totally agree with you CI – I’ve been a subscriber to his Gloom Boom Report for awhile. I like Faber because if he is wrong he can turn on a dime and adapt. He gives lots of good investment advice ideas too. He’s abit obsessed with his buy a farm and a shotgun ideaology though – oh and put your wife to work on it !. He wants everyone to leave American immediately.
Robert Schilling, who was a bear and predicted this, has recently switched – in his latest interview. He even suggests another housing bubble could be underway.
If you look at Buffets cash holdings he has approximately 10 billion in cash down from approx 30-40 billion before.
In fact Mike Stathis has suggested we have been in a bear market since 2000. Marc faber mentioned in a bear market you can have swings of 100 percent or more. He suggested its abit silly to stay on the sidelines in that scenario as it gives almost bull market returns. He said it is even possible we could get to similar levels of 2007 if we print enough money (thats abit of a stretch!)
Another good website is this one – it tracks alot of the investment filings of funds all over america etc. Alot of top investors are sneaky.
http://www.marketfolly.com/