Business is Personal (Finance)

Since the financial markets fell right through the floor in 2008* plunging the global economy into chaos, the U.S. government and Federal Reserve has tried every rabbit in the hat to restart the economy.  Bank rescues, buying assets at inflated prices, mortgage modifications, nationalizing GM/AIG/Fannie Mae/Freddie Mac, decreasing paycheck withholdings, extending unemployment and even just creating money -- all in told, about 6 or 7 trillion dollars thrown at the problem.  And yet, unemployment is still at about 10% (officially -- unofficially much uglier) and real estate dropped another 1.7T this past year.

* To be more accurate, it was the absurd leveraging, real estate valuation, financial securities valuation and out-of-control banks/hedge funds that created the conditions for the disaster.

Where is all this money going?  From what I'm seeing here, China looks to be a big destination for much of the U.S. Dollars borrowed/rebated/created.  Cost of living is up but real estate prices are up even more.  When we purchased my condo in the relatively backwaters city of Taishan, we paid 2000rmb/m2.  Back then, people were regaling us with tales of 1700rmb/m2 in the same development a year earlier so we called everybody we knew for favors and got a measly discount of 35rmb/m2.  This year, every unit here is sold out and at about 75% occupancy now.  New construction farther away is starting at 3000rmb/m2 for street facing units going up to 4000rmb/m2 for the best locations.  Our unit has a very nice view as it does not face any buildings from either the front or back so if we used a conservative 3500rmb/m2 for current value, this calculates out ot a 75% appreciation -- 45% after factoring 75% recovery on build-out.

Now we have no plans to sell (where would we live then?) and +45% on unleveraged tens of thousands is no big deal in the context of our total portfolio.    It is interesting to see the effect of political and monetary policy 6000 miles away.  Tax cuts, unemployment payments, social security bumps, payroll tax holidays -- what happens when the average person gets these?  A big chunk is spent on goods made in China which means stimulus in the U.S. stimulates China more.  Bank bailouts and other rescue initiatives targeted for the wealthy kept them solvent.  But instead of using that money to then reinvest in the U.S., they've been chasing hotter returns like gold, commodities and emerging markets.  So since 2009, there has been a massive flow of USD into China and in order to keep the currency pegged, RMB is constantly created.  It's no surprise that after QE2 was announced and implemented, there was a nice spike in China's inflation.  All the local merchants we bargain with say their costs of doing business are up since roughly that time.  But the big target of monetary inflation is real estate as people here have to put it somewhere and they're still nervous about stocks after a 70% drop in 2008. (Looking at FXI, it has recovered to a 38% loss.)

This will not end good ... China will have no choice to not only raise interest rates but also further strengthen their currency to stave off a replay of the U.S. and Europe in their country.  For now, I suspect the usual lag in noticing an asset bubble and finally popping it will be in play.  After all, people were saying WTF about internet stocks years before they finally bombed -- same same about housing in the U.S. -- same about the astounding debt levels in Europe.  Investors have the amazing ability to be ignore bad news until such time they lose their nerve and have to sell at a loss.

(Filed in china, economics)