Posted on 03 February, 2010 | 54 Comments
Bubbles have been around forever but in the last ten years, we’ve seen quite a few. It started with the tech bubble in 2001. Then a housing, credit, and M&A bubble in and around 2007. Then a commodities bubble in 2008.
So what’s next?? What’s the next house of cards to come crumbling down? Some are betting gold. Some are betting China. Difficult to say for sure but I’ll go with China as gold looks like it still has some legs left in it. (I also expect hedge funds to push gold to $1,500 an ounce if only because credit is cheap once again, and these guys tend to do silly things when there is easy credit).
Getting back to China, we should note that the Chinese market already plunged 70 per cent in 2008. Then it regained half its losses. But many of China’s fundamentals are getting worse: an Olympic hangover, massive overproduction, high leverage in the real estate market, excess finished goods inventory, and rampant speculation.
Last week, I posted an article on Jim Chanos and his bearish views on China. This is a guy who made quite the call years ago in 2001 by shorting Enron when it too was the talk of the town. It definitely would be interesting to see a similar repeat: market darling come crashing down — kind of like the Wizard of Oz being exposed for what he really was — which was no wizard at all.
The only difference is that our story isn’t taking place in Kansas. It’s taking place on Wall Street where supposedly we have the nation’s best and brightest. And I know that they are working very hard earning every penny of that seven figure salary, “doing God’s work” as Lloyd Blankfein (CEO of Goldman Sachs) will have you believe.
And while I jest half-heartedly about the research analysts on Wall Street, it does concern me when I see few analysts really questioning the legitimacy of the economic growth coming out of China. I must admit that the US is no longer the economic machine it once was and our capitalistic society needs some tweaking, but I would be shock as hell to know that communistic China suddenly had all the answers and fixes in place.
Undoubtedly China has had a good run the last few years but I have to believe US consumer spending had something to do with it. In the absence of US spending, I am finding it difficult to believe that Chinese growth prospects could be so rosy.
How bad can the Chinese market tumble be? Mr. Chanos thinks it could be worse for global markets than the U.S. housing debacle was. Who knows for sure. My own view is that China represents a large unknown and an even bigger risk at this point. Until I see the world really pulling itself out of recession, I am taking an underweight view of resources which, in my opinion, would be the hardest hit. In fact, in some ways, I am still amazed that oil is trading in the $75 a barrel range. Let’s not forget that $60 oil was consider very, very expensive only a few years ago. Yet, here we are in a global recession and we still have fairly high commodity prices in any number of sectors including energy (oil), precious metals (gold), and agriculture (sugar).
Of course, the challenge with any bubble is trying to predict the timing of it. My advice: exercise caution where you can.
Jeff Kaminker
President, Frontwater Capital
November 19th, 2014 at 9:23 am
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