Real e Finance means business
The 'Helicopter
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
Economics Investing
Guide' is meant to help
educate people on
how investing choices
in the current
economic
environment. We have
coined this term to
describe the current
monetary and fiscal
policies of the U.S.
government, which
involve unprecedented
money printing. This is
the official blog of the
New York Investing
meetup.
____________________________________
____________________________________
________________________________________________________________
The truth and nothing but...
The Real Risks
to the Global
Financial
System in 2012
Jan 3, 2012
to the Global
Financial
System in 2012
Jan 3, 2012
As 2012 begins, markets are rallying as they did at the beginning of 2011 --
a year when the S&P 500 closed flat after many huge moves up and down.
The problems in Europe that rattled markets in 2011 have not been
resolved and new problems are or will be emerging in China and Japan.
At the very least, investors should expect another rocky ride in the
upcoming year.
The debt crisis in the EU is far from over. It is simply being momentarily
contained by another short-term solution that will hold things together for a
while until the crisis erupts again. The mid-December LTRO (long term
purchase operations) announced by the ECB excited the markets as any
money-printing scheme would. This new "solution" to the debt crisis is
essentially an attempt to handle a problem of too much debt with more
debt. Already close-to-insolvent EU banks are able to hold fewer assets for
collateral in exchange for cheap funding from the ECB, which can in turn
be used to buy questionable sovereign debt from the PIIGS. While this will
keep Italy, Spain, Portugal and Ireland financially afloat for a longer period
of time, it may collapse troubled EU banks sooner (the real epicenter of
the debt crisis).
Half way across the globe, problems are emerging in China. It is
estimated that there are between 10 and 65 million empty housing units in
the country that investors have purchased with the hope of selling at higher
prices. There are in fact entire "ghost districts" there that are filled with new
buildings and no residents. Prices have become so high that by last spring
the typical Beijing resident would have to have worked 36 years to pay for
an average-priced home. The pressure appears to be coming off though
with new home prices dropping 35% in November. Beijing builders still
have 22 months of unsold inventory and Shanghai builders 21 months. In
the peripheral areas, existing home sales have plummeted -- down 50%
year on year in Shenzhen, 57% in Tianjin, and 79% in Changsha. Investors
should take note that the Chinese real estate bubble is far worse than the
U.S. one that brought the global financial system to its knees at the end of
2008.
Twenty years ago, Japan had a massive real estate bubble and it is
possible that prices have finally bottomed there, but that doesn't mean
that they are ready to go up. Japan has had two decades of economic
stagnation (and is heading toward a third, if it is lucky) because of the
collapse of its real estate and stock market bubbles. Massive borrowing by
the government has prevented the situation from getting worse. The debt to
GDP ratio in Japan is now estimated to be 229% (well above the just over
100% in the U.S.). More people are leaving the workforce there than
entering it and this bodes ill for tax receipts. The aging population is using
up its savings instead of adding to them. This is a potentially serious
problem because the massive debt the Japanese government has
incurred has been funded mostly internally by the savings of the Japanese
people. A lot of old debt has to be rolled over in 2012 and additional debt
is still being incurred. Where the money will come from is not clear.
None of the problems that could strain the global financial system
originated in 2011. They have been building up for years and even
decades. The first major blow up was the Credit Crisis in 2008. In every
case, that problem was "solved" by more debt and money printing. This
approach has of course only postponed the inevitable since taking on
more debt only creates a bigger debt problem down the road and you
can't create something of value out of thin air by printing money (although
you will ultimately create a lot of inflation). The markets have already
spent most of 2011 in an unstable state. It looks like continuing and even
bigger crises await investors in 2012.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21
a year when the S&P 500 closed flat after many huge moves up and down.
The problems in Europe that rattled markets in 2011 have not been
resolved and new problems are or will be emerging in China and Japan.
At the very least, investors should expect another rocky ride in the
upcoming year.
The debt crisis in the EU is far from over. It is simply being momentarily
contained by another short-term solution that will hold things together for a
while until the crisis erupts again. The mid-December LTRO (long term
purchase operations) announced by the ECB excited the markets as any
money-printing scheme would. This new "solution" to the debt crisis is
essentially an attempt to handle a problem of too much debt with more
debt. Already close-to-insolvent EU banks are able to hold fewer assets for
collateral in exchange for cheap funding from the ECB, which can in turn
be used to buy questionable sovereign debt from the PIIGS. While this will
keep Italy, Spain, Portugal and Ireland financially afloat for a longer period
of time, it may collapse troubled EU banks sooner (the real epicenter of
the debt crisis).
Half way across the globe, problems are emerging in China. It is
estimated that there are between 10 and 65 million empty housing units in
the country that investors have purchased with the hope of selling at higher
prices. There are in fact entire "ghost districts" there that are filled with new
buildings and no residents. Prices have become so high that by last spring
the typical Beijing resident would have to have worked 36 years to pay for
an average-priced home. The pressure appears to be coming off though
with new home prices dropping 35% in November. Beijing builders still
have 22 months of unsold inventory and Shanghai builders 21 months. In
the peripheral areas, existing home sales have plummeted -- down 50%
year on year in Shenzhen, 57% in Tianjin, and 79% in Changsha. Investors
should take note that the Chinese real estate bubble is far worse than the
U.S. one that brought the global financial system to its knees at the end of
2008.
Twenty years ago, Japan had a massive real estate bubble and it is
possible that prices have finally bottomed there, but that doesn't mean
that they are ready to go up. Japan has had two decades of economic
stagnation (and is heading toward a third, if it is lucky) because of the
collapse of its real estate and stock market bubbles. Massive borrowing by
the government has prevented the situation from getting worse. The debt to
GDP ratio in Japan is now estimated to be 229% (well above the just over
100% in the U.S.). More people are leaving the workforce there than
entering it and this bodes ill for tax receipts. The aging population is using
up its savings instead of adding to them. This is a potentially serious
problem because the massive debt the Japanese government has
incurred has been funded mostly internally by the savings of the Japanese
people. A lot of old debt has to be rolled over in 2012 and additional debt
is still being incurred. Where the money will come from is not clear.
None of the problems that could strain the global financial system
originated in 2011. They have been building up for years and even
decades. The first major blow up was the Credit Crisis in 2008. In every
case, that problem was "solved" by more debt and money printing. This
approach has of course only postponed the inevitable since taking on
more debt only creates a bigger debt problem down the road and you
can't create something of value out of thin air by printing money (although
you will ultimately create a lot of inflation). The markets have already
spent most of 2011 in an unstable state. It looks like continuing and even
bigger crises await investors in 2012.
Disclosure: None
Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21
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