Despite all the clamoring over a new recession, it looks like the U.S. economy is holding up relatively well. But that doesn’t mean risks don’t remain. The primary risks I’ve been focused on are the risk of U.S. austerity and the exogenous risks from international markets. Of these, the two that stand out are obviously the Euro crisis and the situation in China. A worrisome report from Forbes over the weekend elaborates on what could be a Chinese property collapse in the making:
“Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. Even state-funded experts are more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.
When Beijing’s pet analysts are saying prices could halve in a few months, we can be sure they are thinking the eventual sell-off will be worse. In any event, the markets are bracing for trouble. Investors are dumping both the bonds and the shares of Chinese developers, and legendary bear Jim Chanos, citing the property market, late last month said he is still not covering his short positions on China.”
Remember, this was the single most important driver in the boom/bust cycle in the developed world and while China is likely in a better position to deal with this sort of crisis than the USA or Europe was, there’s no denying that a property bust would have an extremely negative impact on the one strong leg in the global economy.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.