February 23, 2014

A Catalyst For Unforeseen Consequences

Readers suggested a topic on the global housing bubble. “I remember in 2008, 9 and 10 it was fascinating to read how the Chinese, Brazilian, Canadian and Australian housing markets were impervious to the fact the US housing market was tanking badly. Values in those countries were still headed north. Now that those countries’ markets appear to be tanking, will it have any effect on the US housing market recovery? Or is it likely the US market will putter along without much impact from outside its own borders?”

A reply, “Meditate on how much equity California households were liberating to reinvest it in housing markets further inland leading up to the 2008 meltdown. Then think hard about the so-called “all cash” investors from China; was the cash really free, or was it a spillover of an excess of Chinese leverage into the U.S. housing market?”

One said, “Overseas markets tanking may affect coastal high priced areas like silly valley. Probably won’t do much for Flyover.”

The Wall Street Journal. “Over the last two weeks, several major investment houses have published reports exploring the idea of a hard economic landing in China. They include ‘We don’t expect it to happen’ caveats. But what if it did happen? Would the rest of the world tank as well?”

“A catalyst for this concern has been the end of America’s easy-money policies, which buoyed emerging-market economies. The gradual end of the Fed credit flood has sparked concerns that developing countries with high fiscal and trade deficits, excess credit growth, currency risks and other problems could face a liquidity crisis, leading to a broad loss of confidence.”

“‘Given that China is the largest emerging economy in the world and has contributed more than 25% to global GDP growth since 2010, a sharp slowdown or deleveraging in China will likely affect everyone and every market,’ UBS said in its ‘How Might a China Hard Landing Affect the World’ report.”

“The third way that a hard landing in China would affect the world is through market contagion, when a loss of confidence spreads with unforeseen consequences. The Asian financial crisis in 1997, sparked by seemingly inconsequential devaluations in Thailand and the Philippines, drew in economies with supposedly sound fundamentals, including Singapore and Hong Kong. ‘You often hear people say emerging markets are a worry,’ UBS economist Tao Wang said. ‘They could be bearish on China and bullish somewhere else. If you’re really bearish on China, though, I’m not sure you can be bullish on anywhere else.’”

Bits Bucket for February 23 2014

Post off-topic ideas, links, and Craigslist finds here.