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« The Seduction of Market Timing | Main | Do You Adjust Your Price Targets? »

March 25, 2012

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Steve D

If Goldman is saying now is an ideal time to buy stocks, I say that we should interpret that as meaning now is a smart time to pare holdings in equities. Let's not forget that Goldman is the firm where the agents openly bragged about how much they were screwing their own clients.

Angel Martin

Sandoz, i believe it is now generally recognized that china real estate prices peaked last fall and are now declining.

http://www.bloomberg.com/news/2012-03-19/china-home-prices-fall-in-more-than-half-cities-tracked.html

I look at historical patterns more than the opinion of experts like Stephen Roach. People like Roach are experts, but they always see a soft landing, they never see the crash... See chapter 10 in Taleb's "the Black Swan" on why experts have particular problems forecasting crashes and tail risk events in general.

back to China: There has typically been a two to three year time lag between the peak of real estate prices in a bubble, and the stock market crash that follows. Examples are USA in 1926, Japan in 1988, thailand in 1995 and USA again in 2006.

my guess is that people negative on china are going to be wrong in the short term (months) but will be correct in the medium term - two to three years.

Sandoz

From what I've read, and this may not be true, the HSBC flash PMI is more focused on SMEs and the "official PMI" is weighted towards SOEs. It's also been widely reported that currently SMEs are finding it difficult to obtain financing, while SOEs are still able to obtain loans if only because banks feel that a loan to an SOE is equivalent to lending to the state and thus essentially guaranteed. So SOEs are still growing while SMEs are failing. This conclusion dovetails with the recent report by the World Bank seeking SOE reform and less reliance on SOE growth.

As for the issue of hard landing or not, I think one has to look at the facts and not be lead astray by the theories on China's growth. The fact is that housing in China has been in a speculative boom (I call it a bubble, but I know how touchy that term can be). Many people will point to future demand for housing, which may be true, but whenever you have a boom fueled by speculation it's impossible to have "soft landing" for that asset class. Because that asset class and related industries make up a large percentage of GDP, I think it's safe to say that hard times are on the horizon unless the Chinese government can manage to inflate some other sector (as the U.S. did after the tech bubble).

One other note on the Chinese real estate sector. Prices have not dropped because developers are still holding out for a loosening of regulations. Transactions have dropped significantly while inventory has increased significantly. This state of disequilibrium cannot last forever. I suspect that at some point the market will turn into a race to the bottom as developers realize that the golden days are over. That, however, is my theory and has yet to be seen. Regardless, this is only the beginning of tough times for China.

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