I am thinking that overall, the yuan is overvalued.
They own a lot of us treasuries, and the dollar is losing value through monetization and in china they are experiencing high inflation. Inflation is the erosion of purchasing power. I think that there is a real estate bubble in china. I think that the ignorance of that real estate bubble is part of the hypothesis that the yuan is undervalued. When you have a real estate bubble collapse, people are going to realize that the chinese growth story of this century isn’t all it is cracked up to be. Home prices will fall. Lots of “wealth” will be destroyed, in my opinion, it never really existed… it’s all perceived wealth, it’s on paper, and it’s unsustainably overvalued. Anyway, there should be a cash crunch.. inflation in china should be greater than in the usa, as the people at the bottom of the totem pole of life in china watch their marginal purchasing power erode away due to inflation, the demand for real estate that they will never live in because it is in a 100% vacant city that is poorly built and falling apart should diminish. Since prices in the free market are a function of supply and demand, note that in china this is not the case.. price is whatever you want it to be. example, see lotus pharmaceutical’s argument that they have a 0.25^2 mile of farm ground worth $80M USD apparently.. and then they are building a poorly engineered piece of real estate in beijing and are marking it up to the prices that you’d see luxury condos sell for (which are also overvalued by the way). anyway, in this economy where prices are not a function of supply and demand, and there is a highly suspect shadow banking system… a collapse has to happen. you can only build things that dont produce future cash flows for so long before things start breaking down. hate to break it to you, but vacant residential real estate is a non-cash producing liability. so, whenever the government decides that prices are simply retarded, maybe they’ll start a panic selling paragdym. I’ve already advised all of the people I work with to sell any real estate they have in china.
Then again, find me a currency that is going to rise in value… maybe that of oil exporting nations, but they’re crazy too. saudi arabia just gave the green light to build a building 1 mile high, which … frankly is going to bankrupt them if oil prices crash back to $50. over leveraging in good times… good news for saudi arabia is that the dollar is doomed anyway in all liklihood.. politicians will play their games and hopefully soon they stop raising the debt ceiling. who knows… but frankly it seems that global monetary policy is playing a game of chicken. sure, they could veer off and be hated for turning before the other entity did… but odds are in favor of the global governments continuing to grow, continuing to spend more of whatever currency they are printing. budget cuts aren’t cool. cutting programs like medicare, medicaid, social security — impossible.
frankly, if the US government was a business… management is incentivized to spend more and take in less. the company already isn’t making money. the way things are is obviously not sustainable.
if the chinese government was a company, they’d be lying on their income statement by artificially marking up their assets and faking it till they make it.. but the question is … where are they making it? what’s the objective? also, not sustainable here.
so, who benefits, who gets the short end of the stick? the poor. inflation/hyperinflation is the ultimate tax on the poor, anyone who has fixed income investments (the elderly usually), the middle class (their wages dont rise as fast as inflation rises, same goes for government employees)..
well, that leaves the rich. if you have assets, they all get marked up. if you have liabilities, you owe less back in the future than you borrow now (the purchasing power of currencies erodes).
so what do you do? you leverage up and buy liquid hard assets. maybe that’s why gold and silver and commodities are soaring.
us real estate would be doing really well, but when you levy the ultimate tax on the poor, that takes the concept of home affordability and beats it in the back yard. discount cash flows from homes that people cant afford.
anyway, hopefully china crashes first, bringing down the price of commodities, but who knows.. i certainly dont. things are going to trend.. the stock market could drop more than 50% in conditions like this, and in terms of purchasing power, it will drop more you just wont see it. I take the S&P500 and divide it by the price of gold, myself. If you compare gold and paper currencies, it’s a lot easier to make the paper.
in terms of explaining the concept of what china is doing to a young child, the story would go like this: imagine that you have a family of 1 and starting in 2000, you make 1 sandwitch a day and every year you add 1 sandwitch to your daily production.. so now you’re making 11 sandwitches a day for yourself. eventually, you’ll find that you’re making sandwitches you don’t want to eat anymore. sure, we can store them in the freezer, and buy more freezers to store them in, but after a certain point, you’ll run out of the ability to make sandwitches and store them, because you’ll run out of time or money, or both — especially when the cost of making the sandwitch goes up (inflation). and that’s where china is. they’ve built so many homes that they started building them and storing them, vacant. they are running out of money to perpetuate the bubble and the timing is right now. this is my warning: get out.