Red Dragon Snowflakes

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:

red-dragon-snowflake

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.

money-supply

Source: WSJ 11-1-16

At the same time Chinese debt has nearly doubled:

debt-as-gdp

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:

shenzhen

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-i

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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Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?

Joe Briner
Managing Director
Vertical Capital Advisors LLC
briner@verticalcapitaladvisors.com
866-912-9543 ext 108

 

 

 

Reference: http://www.wsj.com/articles/asset-bubbles-from-stocks-to-bonds-to-iron-ore-threaten-china-1477952654

 

 

Author: JoeBriner

Joe Briner is the Managing Director of Vertical Capital Advisors LLC. He is a financial executive with 25+ years experience starting, growing and leading profitable businesses, most recently focusing on helping businesses of all types recover, grow and thrive.