Wednesday, August 17, 2005

Thoughts on Housing

Primer on my investment outlook

Over the past few months, I have been thinking of the financial markets. In a nutshell, the world economy is dominated by the Eurozone, American, Japan and China. At the moment, the Eurozone and Japan are in a recession. America is growing strongly, but purely driven by the Consumer. Wage and Job growth over the past few years has been anaemic and Savings are at 0%. Consumer spending has occured due to huge gains in housing prices and usage of home equity as an ATM. Also, credit card debt has ballooned.
China is in an investment bubble formed due to the need of the Communists to employ the millions that are being laid off from State owned companies. Chinese banks lend money to anyone who wants it. The borrowers build factories and sell widgets at minimal profits or even at a loss. The banks pretend that they will get paid back. These widgets are sold to the US consumer.
The Eurozone as well as Japan depend on trade with the US and, to a lesser extent China. The rest of the world, Asia, Australia, Canada depend on either China (as a source of demand for raw materials) or the USA (a source of demand for finished goods) for their economies.
In this remarkable world, there live 6 billion humans, whose wellbeing depends on the continuation of an investment bubble in China and a credit bubble in the US. Ultimately this game depends on the US consumer who has shopped despite snow, rain or sun. At some point in time, the rate of increase in US housing prices will slow or even stall. Note that I am not even talking of a crash, simply a moderation to inflation rates (3-4% increases each year). Thats all it needs to cause consumption in the US to slow. Once consumption slows, a direct effect will be a slowdown of the investment bubble in China. Once this bubble slows, there is a double whammy. A slowdown in growth in China as well as in the USA.
6 billion humans depend on their wellbeing on the spending of 300 million American consumers who depend on credit from a housing bubble engineered by the Fed Chief, Alan Greenspan, who is now trying to slow or bust the bubble.. A remarkable world indeed !!


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