Friday, November 3, 2006

Another asset boom

Forget trade deficits, the real worry is what China will do with its money

It may be that asset diversification by China will be the thing that continues to drive up asset prices this cycle to what will eventually be unsustainable levels. But which assets will get the lion's share of the money: stocks, property or commodities?

Posted by sold 2 rent 1 @ 10:58 AM (418 views)
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12 thoughts on “Another asset boom

  • Gold is showing some strength again.

    It hit 625 today – up from the low of 560 last month
    http://newsvote.bbc.co.uk/1/shared/fds/hi/business/market_data/commodities/11631/one_month.stm

    Over the next 2 months, if commodities can hit the highs of last May and the stock markets go into reverse, we will have confirmation that we are in a secular bear for stocks and secular bull for commodities.

    For me this would mean an outlook of a high inflation and high IR era. With this view there is only one way for property to go – down.

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  • What if China decide to invest all this money in property here??? BOOM again…People say how mad prices are now, but with Abbey giving 5 times income and even others willing to lend 7.53 times isnt property still the way to go?? Even EA’s are happily quoting it will never go down and they REALLY know there stuff..LOL

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  • I disagree. High inflation and high IR do not necesarily go hand in hand with lower property prices. Sure, it’s a possibility but why do you think granny’s house only cost £5k back in 1970 and is now worth more than her pension? Inflation is a great debt reducer and by far the biggest borrower today happens to be the government. What do you think their call is going to be?

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  • little professor says:

    China has a massive trade surplus and is currently sitting on almost a TRILLION dollars worth of foreign exchange reserves – most of it denominated in dollars.

    Over the last decade or so the US has been increasing spending by simply printing more money. The reason they have been able to increase the money supply without risking inflation is that the Chinese were soaking up all the dollars. If China suddenly decides to diversify by for examply selling dollars and buying euros or gold, the market would be flooded with dollars and the value of the dollar would collapse. Cue hyperinflation and the collapse of the American economy.

    Of course, this will never happen as America is far too important to the Chinese as a trading partner.

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  • waitingfor hpc says:

    but the govt can not hide forever from inflation. If it is about then it will show through and banks and goods will push it up and rein in govt borrowing – and end to the new labour madness (at last). If only…

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  • China may be playing the end game. The industriousness of the Chinese may be based more in political ideology of communism rather than the capitalist ideology of trade.

    Ultimate excellence lies,
    Not in winning,
    Every battle,
    But by defeating the enemy,
    Without ever fighting

    Sun-Tzu (Chinese General to the Qi dynasty – around 500 B.C)

    Could it be so that the Chinese saw trade imbalance as a perfect oppourtunity to become the new super power and at the same time ruin imperial US?

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  • little professor,

    The US is not a trading partner in the normal sense as the US exports only debt to China – not a particularly useful commodity. Even by Chinese standards there is at present a very active debate in China regarding the $. The Chinese are clearly scared that if they diversify their holdings or appreciate the Yuan American purchasing power will fall leading to Chinese unemployment, social unrest and the elite out of power. [India, as a democracy, and as a country that has a wider spread regarding export countries, does not have the same vested interests as China in propping up the US economy.] However, even a trillion dollars (plus billions every month) held faithfully by China will not save the dollar if other countries loose faith, as they periodically do. The thing to watch for is China not diversifying it holdings, but diversify its trading partners (note several recent high level contacts between India and Russia), which will eventually give it the freedom to quietly dump US debt.

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  • China will stick its money in its ears whilst blowing a huge raspberry at the west. Sorry Harold, after such an insightfull post this is childish, but im drunk, and its true.

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  • The Chinese may be playing the end game in the final stages of the Cold War. Sun Tzu said, “Ultimate excellence lies, not in winning every battle, but in defeating the enemy, without ever fighting.”
    China will continue to amass USD. This has prevented consumer price inflation and ultimately has led to the house price bubble in he US. Money has to find a home. If it’s not CPI (which it is now), it will be land price. Once the Chinese decide to dump USD, US inflation will go wild, taking with it economic and political stability (or the perception of it, there never really has been). With economic power gone, US domination will end. The Chinese have won, “without ever fighting”.

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  • Apparently Africa is becoming the major trading partner for China, since the Chinese don’t threaten sanctions nor withhold trade in any respect whilst pointing to human rights issues the African nations may be avoiding. According to news reports today, having just been relieved of a large amount of debt by the G8, Africa governments are apparently turning their attention to the East and are much freer to do so without any reprisals for a uniformly abominable record on genocide, systematic neglect and outright torture.

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  • Don’t a lot of Chinese stores of USD find their way to purchase companies and land in the US? China has a stock of USD that could ruin imperial US, and it also physically owns a (relatively) large amount of the US.

    If it promotes it’s domestic market and then pulls the plug on the US it really could cause pain in … I give up, the hangover is too much … you get the jist…bye

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  • Inbreda…

    Reminds me of a game we had as kids, “Pick Up Sticks.” You are given a handful of identical coloured chopstick sort things, you toss them into a heap, then try to remove sticks one by one without jarring or toppling the rest, getting point for each one you carry away unscathed, and being “OUT” when you’ve caused something else to move. Impossible at times to see what is leaning against what, and all the subtle connections. Sooner or later — YOU LOSE! Someone else gets a chance. Perhaps we had this game as training for modern life and the realisation that we can’t any of us really understand all the implications of what we doing and what may happen to the whole “pile of sticks” one day to the next and that, sooner or later, we are OUT and others are in control.

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