bubble

Can We See a Bubble If We’re Inside the Bubble?

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housingCharles Hugh Smith – If you visit San Francisco, you will find it difficult to walk more than a few blocks in central S.F. without encountering a major construction project. It seems that every decrepit low-rise building in the city has been razed and is being replaced with a gleaming new residential tower.

Parking lots have been ripped up and are now sprouting condos and luxury rental flats.

The influx of mobile/software tech into the S.F. Bay Area has triggered not just a boom in tech but in all the service sectors that cater to well-paid techies. This mass of new people has created traffic jams that last virtually all day and evening, and overloaded the area’s BART transit rail system such that trains at 11 pm are as jammed as any during rush hour.

This phenomenal building boom is truly something to behold, as it has spread from S.F. to the East Bay as workers priced out of S.F. move east across the Bay, driving up rents to near-S.F. levels.

This is of course a modern analog of the Gold Rush in the 1850s, and the previous tech/building boom in the late 1990s: an enormous influx of income drives a building boom and a mass influx of treasure-seekers, entrepreneurs, dreamers and those hoping to land a good-paying job in Boomland.

The same phenomenon has been visible in the Oil Patch states every time oil/gas skyrocket in price. Continue reading →

Forget The Fake Statistics: China Is A Tinderbox

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chinaCharles Hugh Smith – When China’s tinderbox economy implodes, who will be left to bid up the world’s surplus commodities and real estate?

After 30 years of torrid expansion, perhaps the single most consequential factor in China’s economy is how much of it is a “black box”: a system with visible inputs and outputs whose internal workings are opaque.

There are number of reasons for this lack of transparency:

1. Official statistics reflect what officials want to project, not the unfiltered data.

2. Policy decisions are made behind closed doors by a handful of leaders.

3. There is little institutional history of transparency.

4. Many important statistics are self-reported and prone to distortion.

5. Large sectors of the economy are informal and difficult if not impossible to measure accurately.

6. Endemic corruption distorts critical economic yardsticks.

7. There is little historical precedent to guide policy makers and individual investors.

None of these is unique to China, of course, with the possible exception of #7: few nations in history (if any) have experienced an equivalent boom in infrastructure, credit, housing and wealth in such a short span of time.

Saving Face By Editing Data

As anyone who has lived and worked in Asia can attest, public perception (i.e. “face”) is of paramount concern. There is tremendous pressure to put a positive spin on everything in the public sphere. Negative publicity causes not just the individual to lose face, but his boss, agency, company and family may also be tarnished. Continue reading →

No Bubble Here: $1.5 Million For 750 Sq. Ft. Flat, Rent A Bed For $1,000/Month, Or 20 Beds In 7-Bedroom House For $21,000/Month

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millionCharles Hugh Smith – Those who say there are only two sure things in life, death and taxes, should add a third sure thing: realtors and stock market mavens will deny there’s a bubble even when it’s obvious to everyone the bubble has already reached insane levels of overvaluation.

And so here we are yet again, with housing and stocks both hitting price levels that make no sense in terms of traditional measures of value. And since these pesky metrics make it impossible to claim there’s no bubble, those benefiting from the bubble have to claim that this time it’s different: not only is the current bubble rational, there’s no reason it can’t keep expanding indefinitely.

In a zero-yield world, it’s perfectly reasonable for corporations to borrow trillions of dollars to pump up their own stocks with buy-backs. Profits may be sagging but thanks to the miracles of Cargo-Cult mumbo-jumbo such as margin expansion, profits don’t really matter that much. What counts is the central banks have our back: to guarantee a profit, just buy stocks now before the central banks push valuations even higher.

Housing may not be in bubble territory everywhere, but it’s reaching bubblicious heights wherever global hot money is pouring into the domestic economy: for example, the San Francisco Bay Area. Global hot money has two increasingly desperate goals:

1. find a positive, low-risk yield

2. shift the staggering gains reaped from corruption and central-bank financialization bubbles into hard assets such as Impressionist paintings, real estate, etc.

On a global scale, trillions of dollars are sloshing around, frantically seeking a low-risk yield or hard asset.By some estimates, $2 trillion has already fled China as corrupt officials and cronies are rushing their ill-gotten gains out of China before the hammer of social unrest comes down on their fortunes. Continue reading →