I’m not a Bandwagon China Bear

Why China’s Bubble will lead to the Global Economic Reset.

I studied finance and traded stocks in 2000, Lived in China in 2006, Worked in the Mortgage Real Estate Business, and now Technology since 2007. I have been on the inside of every one of these bubbles.

For the record: I purchased this domain back on May 4 2010. Why didn’t I start writing then? Lets be honest, its depressing and difficult to have this negative outlook, people just want to slap you. Its not healthy, and nobody really wants to hear it. They are too busy getting drunk on Federal Reserve Bank stimulus flavored Cool Aid to care. “they” is everyone in the world this time.

You may ask, how the hell did you get to such a depressing state of mind? Before we get to all the depressing shit, lets get some high level perspective on this outlook and theory.

I’m not a permanent doomsday pessimist. The world is not going to end, and you probably won’t need to start prepping for the Zombie apocalypse any time soon. I’m very optimistic about the long term prospects for our world in general, based on some fundamental technology trends like, open source, decentralization, bitcoin, big data, and freedom of information. I’m especially bullish on Asia because of fundamental demographic trends, culture, and small government burdens. BUT……….ONLY after we go through a thorough a painful Austrian style global reset and deleveraging. I am equally as confident that the coming “Golden Age” will bring about more opportunity, freedom, and equality the likes we have never seen before on this planet. @kimmaicutler wrote an excellent piece on long term technology innovation cycles. Some believe 2001/2007 were the turning point. But I agree with this article that subtly suggests we are not yet there yet.

Long Term Innovation Cycles.

Dot.com Bubble #1

The story starts in the Early 90’s; We were the first generation to grow up in the internet age. “ping bong ping ping squawk ping pong” the sound of using a painfully slow 14.4Kb Modem on the only phone line in the house. Little did we realize this “internet” would change the world as we know it. My economic education started back in 1997, studying finance at Arizona State. My crazy/genius roommate from upstate New York taught me about technical stock chart analysis and we had fun playing in the market watching AMAT, CSCO, INTL and other tech stocks rocket to unicorn land. Then when reality set in, we witnessed the great Dot.com Bubble burst in 2000/2001. Lucky for me this uninspiring job market provided a solid justification/excuse to delay the reality of a monotonous life of indentured servitude and instead backpack around the world while taking advantage of the strong dollar. At the time it was about .5o cents per Australian dollar, and .70 cents to the Euro.

Mortgage Real Estate Bubble #2

I had very few choices but to take a job in one of the most lucrative industries at the time and I started working at Countywide Home loans in 2002. I rode that bull bubble #2 till I could no longer stand to be a cog in the wheel of the fraudulent Ponzi scheme that is modern day fractional Reserve Banking system. This way way before any major issues, at the time I was so confident that the good times would soon end, I quit my very lucrative job, moved to china to teach English for a year, and think about getting into the “internet business”. If only I would have speculated on the demise. We looked for ways to profit from it, found some put options on banks, but eventually never had the balls to place the trade. I might be retired like the Greg Lippmann from the recent movie “The Big Short” At the time I recall it was so obvious to me. It was just a matter of time i told myself.

I really enjoyed China, its people, culture, and non stop entertainment. I was blown away, shocked that all my preconceived biases created by a lifetime of anti communist propaganda. I had no idea what to expect, but I was greeted with open arms and curious minds. Many of my students have never seen a “foreigner” and it was shocking to see in many ways they had freedoms that even made the united states look totalitarian. Their economic system for small business did not have the some government burdens we have here in the US: Not because the communist party didn’t want to regulate them, they just didn’t have the resources. I was instantly sold on this China story. Their growth was simply an organic product of their massive billion plus hard working population. The sleeping Giant is awake. China Bull!

China, Energy, Auto Loan, High Yield Bond, Emerging Markets, Startup Bubble #3

In 2008 I joined a startup team at Mavenlink. This was the beginning of what will soon be the “Fill in the Blank” bubble #3. Since then have been involved in the tech startup space in California for over 9 years. During this time I have been neck deep in this third big bubble. I’m not suggesting that this time its an internet bubble 2.0 leading the way here, its just one of many obvious indicators that i’m intimate with. This is often one of the mainstream narratives when trying to debunk the “bubble myth” Its just one of the obvious examples of excessive unsustainable gross misallocation of capital in the history of the world. The denial stage of each one of these bubbles is the same. Every time the mainstream media carries this narrative that its “different this time” No we are not in a bubble for bullshit reason x,y,z.

One of my favorite authors Steve Blank wrote about the mania phase of this bubble back in 2011. See the image below: We are now in the denial phase.

The best illustration I have found here with a time laps of unicorn Growth.

It baffles me how short peoples memory is, or maybe its just selective memory. The definition of insanity is doing the same thing over and over, and over, while expecting different results. We are about to do this for a third time in 15 years. Take another look at the historical stock chart of the S&P500 above. It does not take a PHD in Economics from Stanford to make some pretty solid estimates of where this all is headed.

Now Back to China.

Since I was born in 1978 China GDP has grown over 55X. Over this similar time period the United states has done about 7x. This growth has been nothing short of spectacular, and I don’t want any Chinese to take this the wrong way. I Loved china, everything about it, especially the people. They are hard working, friendly, curious, proud, and scrappy.

In the chart above you can see the massive growth of all types of debt equal to 240% of Chinese GDP. I plan to get into more detail in future posts, but this unregulated “shadow banking” industry could be much bigger. The general theme here is loose monetary policy leads to over spending and gross misallocation of capital. There are many examples of ghost cities in china I will cover in later posts.

Two of the all time most successful hedge fund investors are openly bearish on china and global growth. See below.

Over Simplified time line of events:

  1. Fed debt fueled Stock Market Bubble #1 — United states is drunk on $$ and buys lots of cheap Chinese shit. China uses all this $$ to buy us Bonds.
  2. Federal reserve Quantitative easing and Low interest rates
  3. China artificially holds its currency low to make its products cheap
  4. QE2, QE3 and low Rates = Lots of rich people with money need to find higher yields outside of the united states. This causes massive dollars flowing into Emerging markets and china leading to over investment.
  5. United States and Europe Economic Weakness = we buy less Chinese stuff.
  6. China Stock market correction and economic growth challenges — leads to commodity bubble selloff. China Copies Federal reserver with QE.
  7. Federal Reserve bank “hints” at raising rates. Massive exit of investment in emerging markets flight to safety back to the higher rate US dollar.
  8. Rate hike accelerates Oil and Commodity prices sell off, impacting resource exporting countries like Canada, Australia, and Brazil.
  9. Chain reaction in Oil causes Severn Wealth funds in countries like Saudi Arabia to start selling Stocks and Bonds to pay the bills. Oil below $30 is not profitable for most countries. Chinese are so fearful they are buying real estate in the United states.
  10. Today we are in an global recession, slow growth, high debt, and risks everywhere. What comes next is more a function of when not if.

In summary: Central Banks around the world literally printing money causes massive imbalances in the global economic environment. You can’t escape the natural laws of the universe. Its not China’s fault, but they will be the catalyst this time for the next bust.

In a series of future posts I hope to bring some insight to what caused this massive cancerous growth, why we don’t have a free economy, stock market without manipulation; why this monetary fiat Ponzi experiment is bound by the same natural laws that govern Physics and Biology. I will show you that almost every major challenge we the people of the world face (inequality, pollution, war, terrorism, cancer, diabetes) is directly related to this failed economic experiment. I don’t want to just be a wet rag of depression doom. I also plan to outline some possible solutions that we can implement to ensure a better future. We need to get back to reality for the sake of our children.