We found it! The snowflake that will start the avalanche. The Red Dragon Snowflake. Here’s a picture of it falling right outside our window:
In fact, the first sign of the avalanche has already happened. There is a very good chance that it will start in China and that it will start with rapidly falling real estate prices.
Take a look at China’s money printing binge since 2000. It dwarfs ours here in the U.S.
Source: WSJ 11-1-16
At the same time Chinese debt has nearly doubled:
And now, the Chinese, who by and large are incipient investors, preferring the hard asset class of real estate as their preferred investment of choice, started to pull back from real estate this year:
Kind of looks like a snowflake falling. Certainly resembles a mountain peak. Definitely represents a bubble bursting.
The Politburo centrally-controlled Chinese economy will likely be patient zero for the next correction/recession. Look for phrases like “Asian Contagion” to ripple through media reports in the coming weeks. The decrease in asset values in China will not have much of an impact on the rest of the world because China’s capital account is largely closed, it has enormous reserves and nearly all of its debt is held domestically and all of it is denominated in yuan. But because markets tend to react psychologically as much as they do to economic data, when the panic starts, because of the sheer size of the Chinese market, there will be panic selling globally. The Politburo can continue offering cheap credit and forcing Chinese citizens to invest in financial assets for a time but even the Chinese do not like to see their net worth drop, especially when it is heavily leveraged.
All bubbles burst. We know we are in one now. China knows it too.
What should you do about it?
Bolster cash reserves. Very soon, you may be able to buy good, income-generating assets like you could have at the bottom of the crash in 2008-2009. Maybe at late 80’s prices.
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