Hmm...where was I ? Such a busy night. I did a fun video with the one-and-only @GeorgeGammon and now this...
Yeah, so it's not the 55 m empty housing units nor the end of China's mega trends, NO, it's the 93 million properties currently under construction !!! Now I don't care how Confucius super smart you are, that's a whopping problem. That's inter galactic. That's friggin bonkers
China's "real" housing demand is reckoned to be 7 m units p.a. Put another way, China is presently constructing 20x the no. of homes that will be necessary for 2030...How do you like them cliches..?
Just completing this year's vintage will be enough to house the entire population out to the year 2050...
Buy-to Bet accounts for this egregious nonsense.Don't get me wrong, I'm guilty of this in St Barths but at least I furnish them and all the houses here are lived in. Question. What is a Tier 3 city? Well they have up to 3 m people and 90% of their new units are never furnished...
Enough of the pub quiz. I wish I had been smart enough to buy Chinese property developers. For a long time they were one of the best business models on the planet. Like Countrywide and Washington Mutual from a bygone era they could blithely commit to more and more silly projects
because the knot of co-dependency didn't exist. Build a condo project in London and you'll be lucky to earn 5% of the cost back from pre-selling off the plans and a silly showroom. In China, they recoup the entire cost once 1/3rd is built and then they're off to the next worksite
So those who know the market best recognise the dangers least. Classic bear market sign. It was exactly the same problem with the US mortgage originators - who cares for risk when you can get it off your BS almost immediately ? The developers are just the tip of the iceberg...
So yes, Confucius trained Chinese bureaucrats reckon they can tidy this mess up with obfuscation and the odd and long drawn out nationalisation. And quite frankly, even though "true" total debt-to-gdp is likely 4x, who cares if the sovereign debt load ballons further; not I...
But the crux of the problem is what to do with all those blinking 93m units awaiting completion? That's a head scratcher. If the State follows thro and completes them then prices will collapse. The pipeline is so big because nobody wants them !!
China's property "wealth" is 4.3x GDP and its total wealth 8x GDP. Consider then the US housing crash of 2007/8. Average house prices fell 30% and wealth contracted 20%. The result ? To this day, the West finds itself trapped in a silent but prolonged depression.
Now work those figures through your Chinese GDP calculator. The hit to GDP would be 1.5x GDP in the most unlikely event that a 30% haircut would clear the immense overhang of surplus unwanted homes in China. The US had a liquidity crisis not a monstrous malinvestment problem.
Soros cries foul. The great man wrote, "Xi does not understand how markets operate." Investors yawn !! George, George, George, they arrogantly conclude, you're so out of touch, don't you know the Chinese bureaucrat is the match for any problem...But George I'm on your side...
Investors ? we're all guilty of using the wrong calendar, of stopping out the China property bust thesis too early, of failing to grasp the slower Chinese cycle. Almost everyone now accepts that gov debt / gdp doesn't matter but they're wrong to conclude that China is inviolable
And with immense ironic indifference the yuan creeps higher and higher. All the adults are asleep. An operationally and financially leveraged volatility machine inches closer and closer to the edge
So what to do ? Short the FX? Why not? But why now? I need trend legitimacy for my trades. Narrative only is for naives. At 6,50 ? Maybe...but I'm still unsure what a currency deval solves ? All the crazy stuff is mostly internal so what difference does a deval make? Don't know
Maybe the trade answer is blinking obvious - staring right at us in full sight? You seen the 2s10s US Treasury spread? It's absolutely collapsed to zero. What do the Ts see?
Convexity? Market's best guess is that the clueless will hike rates to 1.5%. This year the biggest challenge for the clueless has been to prevent US T bills pricing negative despite the BOOM. Hmm, 100 strike Sept 23 eurodollar strikes ? I don't know, I'm just your midnight dancer
93 million units awaiting completion, perhaps they will invade Taiwan after all...I'm out of here and heading to bed. Soyez courageous...😘 Your midnight Rambler.
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