Everyone is on bubble watch nowadays, me included, as central banks flood their respective countries with mountains of money. While the US has done a ton of printing of dollars it is often overlooked that the Chinese have also printed a ton of Yuan as well. While there are definite differences in the economies of the US and China, we could argue those difference all day long, the one thing we could all agree on is that China a lot of flaws in its system. I would counter by saying their flaws are probably pretty severe, but no worse than the US.
Regardless, I have been reading a lot about the bubble in China, especially in their real estate prices. I do not doubt that as property values have gone parabolic in the country, some areas make the peak price increases in the US look like pathetic in comparison, but is it the same bubble that the US had? The answer is, no one really knows for sure because the data is spotty at best. My guess is that the price bubble is probably worse than the US, but I am willing to bet that mortgage fraud, home equity loans, securitization and the host of other issues that basically collapsed the world economy are not the same, at all.
So, at the end of the day, we will see a price collapse in China which will lead banks to have losses on their books, but it will end there. It will likely be as bad as the early 1990’s in the US banking system compared to the 2008 collapse that the US had and it will more than likely not spread globally like the US credit collapse did. However, it is problematic for the world to have the second, it surely has beat out Japan by now, largest economy approach a huge bubble so early in its quest for world domination, especially when it is the manufacturing center of the world.
If the bubble pops, which it will, it will take capital to fix which means that money will not be loaned out to manufacturers. When that happens the cost of capital will increase driving up prices which means your trip to Walmart will not be as cheap as it once was, especially if Washington forces the Chinese to strengthen its Yuan as well. That will be a problem for us and the rest of the world as China led the world out of the recession, if you believe it is actually over that is, so if China contracts it will lead the world right back into a recession, or make the one we are in even worse.
It is just interesting that Americans always assume that everyone acts like they do and spend all of their money. The Chinese are fanatical savers and it is highly unlikely that they would leverage their home, i.e. home equity loans or lines of credit, to buy junk they simply do not need like Americans do. I remember when Lay’s potato chips were trying to make headway into China and one women interviewed said why would I spend that kind of money on that when the same money can buy me potatoes for a month? That is their mentality and they do not spend what we do not have and pay for it later like what we do, that is what I admire about their culture. This is why if or when the bubble pops it will be a major problem, but nothing like what we saw here or in Europe.
With that in mind I am not crazy about investing in China because I believe that the bubble will pop and it will slow their growth down dramatically. Depending how the government handles the issue it could be a nonevent or a huge problem with, believe it or not, political instability. Plus, so much money has flowed into China through BRIC’s it is kind of crazy to keep money there right now. I am way more interested in India and Russia than China and Brazil, but all emerging markets have me a bit nervous because when everyone agrees that is where you should be, well, you know, do the opposite. Regardless, I believe the bubble will pop, but before the China bubble pops the US equity bubble will pop first.
That was the question posed to one Dennis Gartman this morning on CNBC, as we already know CNBC hates gold and anyone who invests in gold, Mr. Gartman said gold was indeed a bubble. One has to keep grounded when Mr. Gartman speaks about gold since he has been dead wrong about it at almost every turn. In fact, sometime this summer when gold was trading at $900-920 an ounce Mr. Gartman actually went short gold and stated he would cover his short at $840 or somewhere in that area. Gold went to $1,000 surely burning his short position.
However, when Mr. Gartman said he liked gold at $1,000 I contemplated selling my position only to buy it back lower, but I figured he would be out well before my time horizon so I held my position. What I find interesting is the fact that CNBC, Mr. Gartman and so many others are so quick to point out that gold is a bubble, but stocks are fairly valued. The only reason stocks are up, as Meredith Whitney pointed out today, is because of a “wall of liquidity” which is the exact same reason gold is up to begin with. Gold is the investment one buys when the dollar depreciates or one fears inflation, technically they are both the same thing, and given the dollars slide is it really a surprise that gold is going through the roof?
Even though I find the bubble argument to be ridiculous over the long-term I am willing to concede this, it has definitely gotten ahead of itself and I do expect a pullback. I believe the floor is somewhere around $1,040/oz which is where India bought its 200 metric tons of the yellow metal. I will be more than happy to buy more at lower levels, but I am not going to chase gold at these levels even though I believe it is a good long-term investment. Depending who you listen to gold either has a target of $1,200 up to $5,000 an ounce, but I have no opinion on a final value except I believe it goes higher. Clearly the market believes it will go higher as well, or does it?
As most of you know there are 2 markets for gold the paper market, GLD, and the physical market, COMEX for physical delivery or coins. Both of these markets have extremely high demand right now because of the debasement of the US dollar, which is undeniable. The question that I have is pretty simple, is the GLD powering gold higher? This wraps into the Vampire Squids game of high frequency trading.
Computers and algorithms simple track buy and sell signals from technical analysis or short-term trends. When the GLD broke above $100 it was a technical breakout so did these HFT machines then begin to get more active in this security? I do not have a for sure answer for that, but I am willing to speculate that it did. Since the GLD has to buy gold based on the shares bought, regardless if it is a person or a machine, when it broke out did these machines keep buying and drive up the price. Again, I would have to say that is not out of the realm of possibility and may explain how the price of gold continues to climb.
If this is indeed the case then there is a bad ending to this tale because as soon as the machines are done with the GLD they will dump it or short it. This could cause the price to swing back below where it should be, wherever that might be. Obviously we will not know if this will happen or not until it is over with, but the one thing I am certain of is that as long as the government and the Fed continues down its destructive monetary path gold will continue to make new highs. However, if I am right about the HFT machines being involved then those highs may take longer to materialize, but they come.
The other thing I am sure about is that at the end of the day gold is not in a true bubble like most seem to think. It is a vote against fiat currencies and the monetary policy of the central banks. Let us not also forget that production of gold, and all the easy to mine gold for that matter, has already been mined and many central banks are buyers of the yellow metal. There is also the individual “gold bug,” like me, who buys the stuff which essentially means that demand will be much higher than supply for some time. According to my economics professor, when supply is below demand the price increases, not that many of the talking heads on the TV will ever realize that point, but it is a reality. The only long-term bubble in the gold market is from the ignorance of those who do not wish to understand the basics of supply, demand and their impact on the price of gold.
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