The Bull 'n Bear on Moving to DEFCON 2
Investors might be well served in moving to DEFCON 2 right now ('Further increase in force readiness, but less than maximum readiness.') I'm a long-term optimist, but it's very difficult to carry that optimism over to a short-term view of economic conditions and markets. I'm looking for positive signs to disprove a pretty bearish outlook, and they are very hard to find. Meanwhile, the evidence of adverse change are popping up with increasing regularity:
- The double-dip in U.S. home prices has now eliminated any rebound off the 2009 low.
- U.S. consumer confidence is slipping.
When one considers that housing prices and consumer spending are the twin pillars of GDP -- and that they are interrelated -- those developments are hardly encouraging. Speaking of of consumer confidence, the post-recession rebound in consumer spending in the U.K. is now projected to be the weakest on record since 1830. Now, the U.K. has chosen a path of austerity, so the example is not directly comparable to the U.S. economy, but it is becoming increasingly clear that the recovery in the U.S. is not following the historical script (i.e., it is weaker than normal -- the "new normal", as it were.)
Meanwhile, an article in the FT argues that the fate of the global economy and the Chinese property arket are increasingly intertwined. That is worrying, since there is evidence that real estate markets in China are in (or near) bubble conditions. I don't think there is a nationwide bubble in China, but the existence of bubbles in local markets is certainly plausible.
Part of this surge in urban real estate prices has been driven by the gargantuan increase in bank lending by Chinese banks that state authorities engineered in response to the global financial crisis. If you want to get an idea of the results of this type of action, I refer you to this article by Reuters, according to which that central state authorities in China are planning to transfer somewhere between $440 and $660 billion in local government liabilities of the localities' balance sheets. The reason? "The governments may default on around 2 trillion yuan ($440 billion) of loans, the Chinese media have reported."
Enjoy the day all the same.
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