“Jim Grant will never work at the Fed.”*
Here’s a fact: China’s banking assets represent one-third of world GDP, whereas China’s economic output represents only 12% of world GDP. Never before has the world seen the likes of China’s credit bubble. It’s a clear and present danger for us all.
And here’s a sign of the times: Amazon, with a trailing P/E multiple of more than 1,000, is preparing to build a new corporate headquarters in Seattle that may absorb more than 100% of cumulative net income since the company’s founding in 1994.
Now, there are always things to worry about. Different today is the monetary policy backdrop. Which values are true? Which are inflated? In a time of zero percent interest rates, it’s not always easy to tell.
(h/t Melinda R.)
Jim Grant will be right eventually, same as all of the other doomsday sayers and the other side that predict equity prices will continue upward. Unfortunately knowing the “that” of something but not the “when” doesn’t help the average person prepare for it.
Anyone who bought Chinese bonds should consider one thing. These are people that put a poisonous substance in baby formula because it tested as protein. Do they really believe the assets backing their paper are going to be there at foreclosure? And in whose court do they plan to collect?
I have a lot of respect for Jim Grant. But, he is well known as a perma-bear. One thing that I am also concerned about is the programmed devaluation of currency by central bank printing of money. Real things like land, machinery and other income producing businesses will have real value. That is where I will continue to invest my two bits. I don’t know if that is smart but it is what lets me sleep at night.
Even worse, as I understand, the formula was intended exclusively for domestic markets. They would poison their own babies for increased profit!
Grant is wrong in his statement that the market is completely irrational. China’s GDP growth is still north of 6%, which is at least double any other market in the world. Canada by contrast will be lucky to have 2% by the end of this year, and the US is expected to be just below 2% by the end of 2014. And any money invested in Europe is dead money; it’s not even returning the inflation rate.
So investment money has been flooding into China. Yes, there’s a bubble. It always happens with booming economies. It won’t last, but it also won’t be the end of the world; China’s underlying economic growth is still there.
And Gus is right. Grant has cried wolf so many times that no one really believes him any more.
There may be reasons to doubt Grant, but, he is correct regarding Amazon, Google, Facebook,Twitter and other’s valuations.
Those are irrational, and make no sense, other than rampant wild speculation on distant future profits.
When the bottom falls on those stocks, that will be scary. Give me a brick and mortar any day of the week, these digital mysteries are a ticking time bomb.
Perhaps not:
http://www.forbes.com/sites/gordonchang/2014/06/01/china-in-deflationary-spiral-new-stimulus-looks-ineffective/
New word of the day – rehypothecation
http://www.theepochtimes.com/n3/column/715921-china-shell-game-starts-to-unwind/
There is never just one cockroach. Expect this to be repeated all over China and some US banks have been big lenders here.