There is a strange global phenomenon related to economic bubbles. When excess is at its peak someone always wants to build the tallest building in the world. In the US the first and most dramatic case was when in 1929, Raskob and his partners bought a parcel of property at 34th Street and Fifth Avenue to start building the Empire State Building. At this point in time the US was the epicenter of a global economic bubble and the start of the Empire State Building signaled the start of the great depression. In 2010 when the Burj Kahlifa, tallest building in the world located in Dubai, was completed, the Dubai economy collapsed.
The second tallest building the Shanghai Tower has just been completed in China and if you look at the real-estate market in Shanghai it has increased over 600% in the last 15 years. China also has 5 of the top 10 tallest buildings in the world, and has several more under construction. The first cracks in China’s economy have just started appearing.
In 3 years China has consumed more concrete than the US has consumed in the last 100 years.
All this construction means that in China, 3.3 houses are being built for every 1 house that gets sold. It’s funny but when I hear about this kind of thing it’s always accompanied by a whole bunch of commentators saying, “this time it’s different because….” Just before the US subprime crisis the home ownership rates peaked at 69%. Today, in China home ownership rates are around 89%. Does China have a lot more credit worthy borrowers that the US? I don’t know if they do but that number seems to be amazingly high to me. What happens if the oversupply starts to cause prices to drop like they did in the US when speculation in California, Florida, Arizona and Nevada caused the US market to crash with devastating consequences?
Many people ask “why should I care? China is a long way away.” In 2008 when the subprime crisis hit the US it took out the economy of several countries. The biggest example was Iceland which became officially bankrupt. This happens because the global financial system is becoming increasingly more connected and money flows from one market to another passing on the risk in the process.
In Seattle, Vancouver, and San Francisco it seems like everyone is talking about Chinese buyers paying all cash for property in North America. This is definitely the smart money that understands the risk and is getting money out of their country by buying foreign assets to protect their gains. Currently, a large percentage of the high-net worth people in China want to get some or all of their money out of the country. This flow of money is driving prices to artificially high levels in key coastal markets like the ones I listed above. If the government decided to stop this money flowing out of the country these buyers would disappear overnight. The impact would be catastrophic, rippling through the markets where the Chinese are heavily invested. Markets could then start falling almost overnight. Even if the government doesn’t stop money flowing out, a crash in the housing market in China would have the same effect. We live in interesting times, if you want to know more, I created a course on Udemy to help people understand the risk and how to protect yourself.
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After living in 3 countries and experiencing different financial systems, I found myself questioning things that a lot of people took for granted. My uncle, who was an international currency trader in London, reinforced this by sharing stories of how a few individuals where able to change the forces of governments-take them on and win. In the process I became an unintentional economist. Thus, I have an alternative view of financial forces and headwinds that affect people’s lives such as the power of debt for good and bad, the true risks associated with different types of investing, and how different people hack the system. To do well today most people need to overcome the financial headwinds they are burdened with. By applying this knowledge it has allowed me to gain time back in my life to spend it on things that create meaning not just the daily grind of trading time for money. I have a great desire to share what I have learned along the way, mentoring others and helping them find their path and devising creative ways to capitalize on various market and economic events. Nowadays, having fun, presenting at conferences on economics and other financial topics, and building a coalition of the willing to take on the world, is my passion; I hope you can join me on this journey.
[…] 6 months ago at a financial conference I presented at in Los Angeles, I talked about the fact that the amount of debt that has been lent to many companies could be the trigger for the next market collapse. At the time, I thought that Glencore, a global commodities company, could be the next Lehman Brothers due to the drop in global commodities. This drop in global demand for commodities is primarily due to a slowing down of the Chinese economy. Which until recently was using enormous amounts of commodities. […]