The Fear Factor in Global Markets
Mexico as a Major Power
Editor, This Week in Geopolitics
This shift has had a huge impact on Mexico’s growth. It is also one of the reasons why the Mexicans are less than positive about their economic position.
The Only Safe Haven Left In The World Is Gold
Globally, Central Banks are resorting to measures which have never before been witnessed in history. Since the beginning of time, ‘boom and bust cycles’ have been a natural economic cycle. Economies, globally auto correct themselves by punishing the ‘excesses’ and ‘rewarding prudence.’
Nonetheless, since the last ‘financial crisis’, the Central Banks, around the world, have been attempting to avert this cycle by artificially supporting the economy and their markets, by using various ‘financial engineering’ tools. However, they have not been capable of solving the problem! They are merely postponing the inevitable!
When Bubbles Burst, Banks Make Mistakes
Following the ‘dotcom bubble burst’, the FED embarked upon an easy monetary policy, which encouraged subprime lending and thereby finally resulting in a ‘financial crisis’ Since 2009, the FED maintained a zero interest rate policy, until December of 2015, at which time they increased rates by 25 bps. Technically, interest rates are still close to zero percent, as indicated in the chart below.
Surprisingly, the policy makers of the Eurozone, Japan, the UK and China have also copied this ‘quick fix’ methodology by the FED, leading to the same disastrous results, globally.
All of these years of ‘easy monetary policy’ have led to inflated assets globally. Vikram Mansharamani, a lecturer at Yale University, told CNBC, "I think it all started with the China investment bubble that has burst and that brought commodities down with it, which started deflation and those ripples are landing on the shore of countries literally everywhere. I mean, we've got a bubble bursting, In Australian housing markets look like they are beginning to crack; South Africa — the whole economy; Canada — housing and the economy; We can keep going on and on."
Did the Central Banks only resolve these issues by reducing interest rates? No! They have also resorted to massive money printing, as well. Since the ‘financial crisis’, the total debt of the world, has increased dramatically, as indicated in the chart below.
Central Banks Go Negative Above
Considering the ‘easy monetary policy’ worldwide, and the amount of money printed, one would assume inflation to be skyrocketing, and growth to be expanding. However, the reality is far from this situation. Most nations are struggling to ward off deflation, and avoid further recession, which means that the Central Banks have not been capable of achieving their objectives.
This has led a few Central Banks to push interest rates into negative territory, for the first time ever. It all began with the ECB, and has spread to Sweden, Switzerland and Japan. As the negative interest rates have not achieved their objectives, the ECB and Bank of Japan are contemplating pushing interest rates even further and deeper into a more negative territory. The FED even considered following the same path. Chairwoman Yellen recently stated, “they are studying it closely, in order to use it, if needed in the future”.
There are a number of experts who believe that the current low inflation rates and low growth environment are due to the incorrect monetary policy of the Central Banks. The Bank of England's Governor, Mark Carney, recently said, “Negative interest rates will only help to perpetuate a world of lower rates and slower growth and are a signal that central bank monetary policy options are now severely limited”, as reported by The Week.
The world is frantically losing confidence that the Central Banks, led by the FED, will be able to react to any financial crisis, within the near future. This was evident in the recent ‘market crash’, despite announcements that were made of further easing by the ECB and negative interest rates, by the Bank of Japan.
When the Central Banks fail, investors move towards different asset classes which are perceived as ‘safe havens’. The U.S. Dollar, the Japanese Yen and the Swiss Franc have been considered ‘safe havens’, in the past. However, no longer are they deemed so! The famous investor, Jim Rogers, states that the U.S. Dollar is the most flawed currency, the Yen is a ticking time bomb considering the unmanageable debt of Japan, and the actions of the Swiss Central Banks led to massive bankruptcies in January of 2015.
Gold Is The Definition Of A Safe Haven
This brings us to the final ‘safe haven’, which has withstood the ‘test of time’, which is gold. It has maintained its’ value during the past 5000 years, and the current rise in gold during the ‘market collapse’ is proof that it is a ‘safe haven status’ which is still intact. Gold rose more than 16%, within two months, on the notion of a ‘financial crisis’. Imagine how high gold will rise when the ‘real crisis’ affects the world economies.
Gold is still more than 30% below its highs. As advised in my last article, traders and investors should buy 10-15% of their portfolio allocation in gold, when it drops to $1150-$1190/oz. levels which I expect will happen over the next 1-4 weeks.
How high can gold go? I believe it can elevate as high as $5000/oz., during a ‘full blown crisis’. With a limited downside risk, and a huge profit potential, followers should buy gold.
After Moore’s law
The future of computing
The era of predictable improvement in computer hardware is ending. What comes next?
IN 1971 the fastest car in the world was the Ferrari Daytona, capable of 280kph (174mph). The world’s tallest buildings were New York’s twin towers, at 415 metres (1,362 feet). In November that year Intel launched the first commercial microprocessor chip, the 4004, containing 2,300 tiny transistors, each the size of a red blood cell.
Since then chips have improved in line with the prediction of Gordon Moore, Intel’s co-founder.
According to his rule of thumb, known as Moore’s law, processing power doubles roughly every two years as smaller transistors are packed ever more tightly onto silicon wafers, boosting performance and reducing costs. A modern Intel Skylake processor contains around 1.75 billion transistors—half a million of them would fit on a single transistor from the 4004—and collectively they deliver about 400,000 times as much computing muscle. This exponential progress is difficult to relate to the physical world. If cars and skyscrapers had improved at such rates since 1971, the fastest car would now be capable of a tenth of the speed of light; the tallest building would reach half way to the Moon.
The impact of Moore’s law is visible all around us. Today 3 billion people carry smartphones in their pockets: each one is more powerful than a room-sized supercomputer from the 1980s.
Countless industries have been upended by digital disruption. Abundant computing power has even slowed nuclear tests, because atomic weapons are more easily tested using simulated explosions rather than real ones. Moore’s law has become a cultural trope: people inside and outside Silicon Valley expect technology to get better every year.
But now, after five decades, the end of Moore’s law is in sight. Making transistors smaller no longer guarantees that they will be cheaper or faster. This does not mean progress in computing will suddenly stall, but the nature of that progress is changing. Chips will still get better, but at a slower pace (number-crunching power is now doubling only every 2.5 years, says Intel). And the future of computing will be defined by improvements in three other areas, beyond raw hardware performance.
Indeed, slowing progress in hardware will provide stronger incentives to develop cleverer software.
The second area of progress is in the “cloud”, the networks of data centres that deliver services over the internet. When computers were stand-alone devices, whether mainframes or desktop PCs, their performance depended above all on the speed of their processor chips. Today computers become more powerful without changes to their hardware. They can draw upon the vast (and flexible) number-crunching resources of the cloud when doing things like searching through e-mails or calculating the best route for a road trip. And interconnectedness adds to their capabilities: smartphone features such as satellite positioning, motion sensors and wireless-payment support now matter as much as processor speed.
The third area of improvement lies in new computing architectures—specialised chips optimised for particular jobs, say, and even exotic techniques that exploit quantum-mechanical weirdness to crunch multiple data sets simultaneously. There was less need to pursue these sorts of approaches when generic microprocessors were improving so rapidly, but chips are now being designed specifically for cloud computing, neural-network processing, computer vision and other tasks. Such specialised hardware will be embedded in the cloud, to be called upon when needed. Once again, that suggests the raw performance of end-user devices matters less than it did, because the heavy lifting is done elsewhere.
For companies, the end of Moore’s law will be disguised by the shift to cloud computing.
Already, firms are upgrading PCs less often, and have stopped operating their own e-mail servers. This model depends, however, on fast and reliable connectivity. That will strengthen demand for improvements to broadband infrastructure: those with poor connectivity will be less able to benefit as improvements in computing increasingly happen inside cloud providers’ data centres.
For the technology industry itself, the decline of Moore’s law strengthens the logic for centralised cloud computing, already dominated by a few big firms: Amazon, Google, Microsoft, Alibaba, Baidu and Tencent. They are working hard to improve the performance of their cloud infrastructure. And they are hunting for startups touting new tricks: Google bought Deepmind, the British firm that built AlphaGo, in 2014.
For more than 50 years, the seemingly inexorable shrinking of transistors made computers steadily cheaper and more capable. As Moore’s law fades, progress will be less metronomic.
But computers and other devices will continue to become more powerful—just in different and more varied ways.
Re-assessing the classic risk-return trade off
“If you can keep your head when all about are losing theirs, it’s just possible that you haven’t grasped the situation.” That was how the American satirist Jean Kerr updated Rudyard Kipling’s poem, and new financial research suggests she was on to something.
It also adds to the growing supply of data suggesting we should re-examine the traditional financial view that investment is about trading off risk and return, with greater risk ultimately rewarded with greater return.
Their research involved a strategy which on average is 100 per cent exposed to the stock market. It then adjusts the amount it holds in the market at the end of each month, according to the volatility experienced in that month. As volatility increases compared to its average, it leaves stocks and goes into cash. In periods of very low volatility it can borrow to invest. The same exercise was performed for the different factors which have beaten the market over time — value stocks, smaller companies and stocks with positive momentum — and it was also applied to the “carry trade” strategy in foreign exchange, and to a range of non-US stock markets.
In 2008, the year of Lehman, the volatility-timing portfolio was barely ever down. Even though it failed to buy at the bottom in March 2009, and went against the wisdom of many pundits, led by Warren Buffett, that this was a time to buy, it maintained its advantage. However, by 2014, after years of strong returns on the market, the buy-and-hold portfolio had almost caught up.
Full details are available in the paper, which is available free online.
Do these findings mean the complete reversal of our notion of the risk-return trade-off? Not necessarily, but they do show that we need to pay more attention to its dynamics over time.
Markets tend to grind upwards steadily over long periods of time, and correct downwards in short and more violent bursts. The premium for taking risk exists, but that premium is not necessarily available when the volatility is happening.
At the other end, the trauma of recent loss allows fear to persist.
A practical implication is that this approach should offer a clear-cut way to make money. If this research gains acceptance, expect “smart beta” funds that use volatility to time exposure to markets.
And these ideas should be very useful for the new wave of so-called “robo-advisers”, which allocate clients’ assets following a few simple rules. Expect wealth managers to program their robots to lose their heads when all about them are losing theirs.
Monetary Madness: The Upside-Down World of Hallucinating Central Bankers
Israel Is Building a Secret Tunnel-Destroying Weapon
As Hamas expands its tunnel network in Gaza, Israel, and the United States are collaborating on a clandestine project to thwart the Islamist group’s subterranean advantage.
By Yardena Schwartz
KHAN YOUNIS, Gaza — Bassem al-Najar has been homeless since August 2014, when Israeli warplanes demolished his house during the 50-day conflict that killed more than 2,000 Gazans and 72 Israelis. Najar lost his brother in the war, and for the next four months, he lived in a U.N. school with his wife and four children, along with 80 other families. They moved into a prefabricated hut, resembling a tool shed, in December 2014, where they expected to live for just a few months until their home was rebuilt. Today, he is still one of an estimated 100,000 Gazans who remain homeless.
Yet while much of Gaza still lies in ruins, what has taken less time to rebuild is Hamas’s subterranean tunnel network, the very thing Israel entered Gaza to destroy.
During Operation Protective Edge, the name used by the Israel Defense Forces (IDF) for the 2014 war, the military uncovered and destroyed 32 cross-border tunnels that snaked for miles beneath Gaza and reached into Israeli territory. Many of them, according to the IDF, began inside homes and mosques in Gaza and ended inside or on the edge of Israeli border towns.
Hamas has made no secret of its efforts to fortify its labyrinth of tunnels, which have emerged as the group’s most powerful weapon — far more effective than its rocket arsenal. In just a handful of tunnel attacks over the course of that summer, Palestinian militants managed to kill 11 Israeli soldiers and capture the bodies of several soldiers in the hope of arranging a future prisoner exchange, in which Israel would trade Palestinian prisoners for the return of soldiers’ bodies.
“The resistance continues on its path of liberation of the land,” Ismail Haniyeh, a political leader of Hamas and former prime minister of the Palestinian Authority, told a crowded mosque in Gaza City in late January. During the 2014 war, Hamas fired more than 4,800 rockets and 1,700 mortars at Israel, according to Amnesty International. Thanks to the Iron Dome, a first-of-its-kind anti-rocket system developed by Israeli engineers with the help of nearly $1 billion from the U.S. government, many of them were shot out of the sky before they could reach civilian towns and cities. The Iron Dome explains the extremely low number of civilian deaths on the Israeli side.
But there is no Iron Dome-type system that has proved as effective at thwarting Hamas’s tunnel network.
Although they are still waiting for their homes to be rebuilt and are living with just a few hours of electricity a day and barely any potable tap water, Najar and other Palestinians are not angry with Hamas for rebuilding the tunnels, which could lead Israel to wage another war to destroy them.
“What angers me is that the occupation is still imposing a siege on Gaza, which prevents the building process,” he says.
In fact, since the cease-fire between Israel and the militant Islamist group Hamas, more than 3 million tons of construction material have entered Gaza through Israel’s Kerem Shalom border crossing, according to Israeli figures. The first major tunnel attack occurred near that same crossing in 2006, when 19-year-old Israeli soldier Gilad Shalit was captured by Hamas militants. Hamas held Shalit in Gaza until 2011, when Israel exchanged him for 1,027 Palestinian prisoners. The prospect of capturing another Israeli soldier, and concluding another prisoner exchange, is one reason the tunnels are so valuable to Hamas.
According to experts in Palestinian politics, there is actually a surplus of cement and other construction materials in Gaza, leading to a black market that has enabled Hamas to easily repair the tunnels that Israel destroyed in 2014 and build new ones.
“It’s no secret that Hamas has its ways of getting these construction materials,” says Mkhaimar Abusada, a professor of political science at Al-Azhar University in Gaza. “There are some Palestinians who buy cement to rehabilitate their homes at the fixed price of 560 NIS (new Israeli shekels) per ton [roughly $143] but sell it on the black market for 800 NIS [roughly $205]. This is part of the problem. Some of the Palestinians aren’t using the cement to rebuild their homes.”
While Israel struggles to prevent the construction material it is allowing into Gaza from ending up in Hamas tunnels, it is developing a secret military weapon designed to eradicate the problem.
According to intelligence officials, Israeli engineers are working tirelessly to develop what’s being called the “Underground Iron Dome” — a system that could detect and destroy cross-border tunnels.
According to a report on Israeli Channel 2, the Israeli government has spent more than $250 million since 2004 in its efforts to thwart tunnel construction under the Gaza border.
The United States has already appropriated $40 million for the project in the 2016 financial year, in order “to establish anti-tunnel capabilities to detect, map, and neutralize underground tunnels that threaten the U.S. or Israel,” said U.S. Defense Department spokesman Christopher Sherwood. While the majority of the work in 2016 will be done in Israel, Sherwood added, “the U.S. will receive prototypes, access to test sites, and the rights to any intellectual property.”
Contrary to reports quoting the Israeli Defense Ministry, which claimed that the United States had already earmarked $120 million for the project, Sherwood said that appropriations are done annually, thus there is no guarantee that an additional $40 million will be appropriated in 2017 and 2018.
Among the Israeli companies working to develop the new anti-tunnel mechanism are Elbit Systems and Rafael Advanced Defense Systems, the same company that developed the Iron Dome rocket defense system. Both companies declined to provide any details due to security reasons, as did the IDF and other Israeli officials, who fear that such information could play into Hamas’s hands. Yet according to intelligence sources who spoke with Foreign Policy on the condition of anonymity, the system involves seismic sensors that can monitor underground vibrations.
IDF Chief of Staff Gen. Gadi Eizenkot hinted at these efforts in February. “We are doing a lot, but many of [the things we do] are hidden from the public,” he told a conference at Herzliya’s Interdisciplinary Center. “We have dozens, if not a hundred, engineering vehicles on the Gaza border.”
Yaakov Amidror, a former national security advisor to Prime Minister Benjamin Netanyahu and former head of Israel’s National Security Council, told FP the confidential new system is not yet operational, but it is “in a testing mode.”
Since the beginning of 2016, nearly a dozen Hamas tunnels have collapsed on the Palestinians who were building them, killing at least 10 of the group’s members. While winter rains have been blamed as the culprit, the wave of collapses has led many here to wonder if Israel’s new secret weapon is already at work.
Asked by the Palestinian Maan News Agency in February whether or not Israel was behind recent tunnel collapses, the coordinator of government activities in the Palestinian territories, IDF Maj. Gen. Yoav Mordechai, responded, “God knows.”
Hamas, too, is paying close attention to Israeli attempts to thwart its tunnel network. Haniyeh, the senior Hamas official, told Gazans at Friday prayers on Feb. 19 that the Islamist group had “discovered an underground vehicle on which were installed cameras and sensors to monitor tunnels and fighters.”
Even if Haniyeh’s claim is true, Israel still appears unable to completely counter Hamas’s subterranean advantage. And if the development of the Underground Iron Dome is any indication, it could be several years before Israel is able to employ an effective anti-tunnel system.
In the meantime, Israeli residents of Gaza border towns are growing frustrated with what they perceive as a government that lacks any vision beyond fighting a war with Hamas every two or three years. Israel has fought three wars with Hamas since it withdrew from the Gaza Strip in 2005 — 2008’s Operation Cast Lead, 2012’s Operation Pillar of Defense, and 2014’s Operation Protective Edge. While border residents wish the government and military would do more to protect them from Hamas’s tunnels, many of them also want the government to help the people of Gaza.
“Gaza is a pot that’s about to boil over, and unless something changes there, nothing is going to change here,” says Adele Raemer, who lives a mile from the Gaza border in Nirim, an Israeli settlement.
“People can’t live like that without exploding. They are going to go underground and build tunnels if that’s how they are going to make a living.”
According to veteran Israeli journalist Avi Issacharoff, the former Arab affairs correspondent for Haaretz, digging tunnels is one of the best ways to make a living in Gaza. Tunnelers typically earn about $400 a month, says Issacharoff. It’s a decent salary by Gaza standards, where unemployment is among the world’s highest, at 38 percent, according to the Palestinian Central Bureau of Statistics.
“It’s a two-pronged problem,” says Raemer, a New York native and mother of four. “On the one hand, we have to protect ourselves, but on the other hand, we have to make it livable on the other side. I believe the people in Gaza want the same things we want here: security, safety, the ability to put food on the table for our children. It’s just complicated when you have Hamas ruling there. They’ve held us and the people of Gaza hostage.”
Raemer ends our conversation with a lament: “We’re worse off now than we were before Operation Protective Edge, because Gaza is getting worse. Operation Protective Edge was supposed to protect me.”
In temperament, he was “bombastic, inconsistent, shallow and vainglorious.” On political questions, “he made up his own reality as he went along.” Physically, the qualities that stood out were “the scowling forehead, the rolling eyes, the pouting mouth.” His “compulsive exhibitionism was part of his cult of machismo.” He spoke “in short, strident sentences.” Journalists mocked his “absurd attitudinizing.”
The Return of the 1930s
Donald Trump’s demagoguery may be a foretaste of what’s to come.
By Bret Stephens
Remind you of someone?
The description of Benito Mussolini comes from English historian Piers Brendon’s definitive history of the 1930s, “The Dark Valley.” So does this mean that Donald Trump is the second coming of Il Duce, or that yesteryear’s Fascists are today’s Trumpkins? Not exactly. But that doesn’t mean we should be indifferent to the parallels with the last dark age of Western politics.
Among the parallels: The growing belief that democracy is rigged. That charisma matters more than ideas. That strength trumps principles. That coarseness is refreshing, authentic.
Also, that immigrants are plundering the economy. That the world’s agonies are someone else’s problem. That free trade is a game of winners and losers—in which we are the invariable losers. That the rest of the world plays us for suckers. That our current leaders are not who they say they are, or where they say they are from. That they are conspiring against us.
These are perennial attitudes in any democracy, but usually marginal ones. They gained strength in the 1920s and ’30s because the old liberal order had been shattered—first at Gallipoli, Verdun and Caporetto; then with the Bolshevik coup in Russia, hyperinflation in Germany, Black Tuesday in the United States. “What are the roots that clutch, what branches grow/Out of this stony rubbish?” wondered T.S. Eliot in “The Waste Land,” in 1922. Mussolini’s Blackshirts marched on Rome the same year.
Modern Americans have experienced nothing like those shocks, which is one important difference with the 1930s. The French army lost more men on an average day on the Western Front than the U.S. lost in our worst year in Iraq. At the height of the Great Depression, real per capita GDP fell by nearly 30% from its previous peak. At the depth of the 2008-09 recession, it fell by about 6%, and soon recovered.
Then again, the pain you’re in is the pain you tell yourself you’re in. Or, at least, the pain you’re told you’re in, usually by political doctors who specialize in hyping the misery of others.
So we’re being “invaded” by Mexicans—except that for years more Mexicans have been returning home than coming here. So China is destroying our manufacturing—except industrial employment has surged in recent years, especially in the Rust Belt. So the great mass of Americans are now unprotected from the vagaries of the global economy—save for Medicare, ObamaCare, the earned-income tax credit, public-employee pensions and every other entitlement that Mr. Trump promises to protect.
All this generates the hysteria, the penchant for histrionic rhetoric, the promise of drastic measures, the disdain for civility, the combination of victimhood and bullying on which the Trump candidacy feeds, and which it fuels. Reading through the avalanche of pro-Trump emails that arrive in my inbox (by now numbering in the thousands), what’s notable are the belittling put-downs (“you’re an $@%&, Bret-boy”), the self-importance (“I make more money than you”) and the sense of injured pride (“how dare you call me a vulgarian?”). This is precisely the M.O. of their candidate.
“In breaking the taboos of civility and civilization, a Trump speech and rally resembles the rallies of fascist leaders who pantomimed the wishes of their followers and let them fill in the text,” writes the University of Maryland’s Jeffrey Herf in a brilliant essay in the American Interest. “Trump says what they want to say but are afraid to express. In cheering this leader, his supporters feel free to say what they really believe about Mexicans, Muslims, and women.”
This is not the politics of economic anxiety or dislocation. It’s a politics of personal exhibitionism, the right-wing equivalent of refusing to be “body-shamed.” Thanks to Donald, the Trumpkins at last have a license to be as ugly as they want to be.
***Mr. Trump’s bid for the presidency takes place during a period of mediocre but nonetheless unmistakable economic and employment growth in the U.S. But as a wise friend of mine noted the other day, what happens when the next bubble bursts and the next recession arrives? A reasonable person can argue that Donald Trump is more Silvio Berlusconi—Italy’s clownish billionaire and former prime minister—than he is a new Mussolini. Maybe. Or maybe Mr. Trump’s style of politics is just a foretaste of what’s to come, especially if an American downturn became a global depression.
In the work of preserving civilization, nine-tenths of the job is to understand the past and stress its most obvious lessons. Now would be a good time to re-remember the ’30s.
For whom the bubble blows
House prices are soaring in big cities, but oversupply plagues much of the country
SHANGHAI, China’s financial centre, does not make it easy on outsiders wishing to buy homes.
Non-residents who are single are banned from buying property. The married are welcome but only so long as they have paid local taxes for two years and make nearly a third of the purchase in cash. Shenyang, China’s biggest northern city, is far more welcoming. Anyone can buy a home there. All to little effect: housing prices in Shanghai, five times more expensive than those in Shenyang, have risen by 20% over the past year; those in the northern city have edged down.
This bifurcation is a worry for the government, which wants to spur growth without inflating bubbles.
A divergence in housing prices between wealthy cities and the hinterland is a familiar problem in other countries—just look at London and Lincolnshire, say, or New York and Nebraska. But the divisions are starker in China. In its most prosperous cities, already giddy prices continue to shoot up, while unsold flats pile up in markets where valuations were low to begin with.
Moreover, construction has long been one of the economy’s main engines, accounting for as much as a quarter of GDP growth until recently. This makes it especially important that the government get the balance right. Doing so is proving hard.
Over the past half-year, the government has unveiled a series of measures to support the housing market that specifically exclude China’s five hottest markets (Beijing, Guangzhou, Sanya, Shanghai and Shenzhen). People buying homes need only make a 20% down-payment to obtain a mortgage, except in the five conurbations, where they must put down 30%. By the same token, in most of the country transaction taxes have been cut by as much as two-thirds for people buying second homes; in the five outliers they have been left unchanged. In Shenzhen, a southern tech hub that is the frothiest market, with prices up by 53% in the past year alone, local officials have vowed to crack down on speculators and expand the supply of affordable housing.
The results of this two-tier system have been meagre so far. The frenzy in the biggest cities stems from the central bank’s steady loosening of monetary policy over the past 18 months.
Although warranted from an economic perspective, it was inevitable that low interest rates would drive asset prices higher. Initially, much of the credit pumped out by banks ended up in the stockmarket, but following its crash last summer, property beckoned as one of the few decent investment options in China (capital controls, which have been further tightened recently, make it hard for Chinese savers to invest their money abroad).
For speculators looking at property, the excess supply in smaller cities was all too evident, so they turned instead to the megalopolises. Du Jinsong of Credit Suisse describes it as a form of groupthink. “Everybody—investors, developers, policymakers and bankers—thinks that first-tier cities are safe,” he says.
Even as the government tries to restrain the excesses, however, it does not want to snuff out the rally in the big cities altogether, for they tend to influence sentiment elsewhere. There are signs that this is beginning to happen. Housing prices started rising month on month in the biggest cities a year ago. In midsized cities (in China, those with populations of 5m-10m), prices have been rising for the past four months. In smaller cities (mere hamlets of 1m-5m), gains have been evident only for the past two months (see chart).
If this upturn lasts, some investors reckon it will spur construction. Commodities used to build apartment blocks, such as iron (girders) and copper (wires), have recovered slightly from their recent swoon, partly in the hope that China’s property market is also stirring. Indeed, a series of mini-cycles in the Chinese housing sector over the past decade followed this sort of pattern: rising housing sales led to new building starts, which in turn pushed commodity prices higher.
Figures from the China Index Academy, a data provider, show that the stock of unsold homes has decreased recently, from nearly 30 months’ worth of sales early last year to 15 now. “A housing market with rising volume and prices clearly does not support the view that, on a macro level, China’s housing market is oversupplied,” notes Liang Hong of China International Capital Corp, an investment bank.
But there is a further vast increment of supply on the verge of coming to market, because developers slowed the pace of construction in recent years and in some cases halted it altogether. There were 4.7 trillion square metres of housing under construction but not yet available for sale at the end of last year, up by 25% from the end of 2011; 452 billion square metres of housing were on sale, nearly three times as much as at the end of 2011. Some provinces and cities are drafting plans to convert unsold homes into subsidised housing for poorer residents. Xi Jinping, China’s president, has said that reducing property inventory is a “battle of annihilation” that must be won to revitalise the economy. Revived demand for new construction, in short, is a long way off.
The exception is sure to be China’s biggest cities, where there clearly is an imbalance between supply and demand. Shenzhen and Shanghai, in particular, are popular with the young and the highly educated, just the kinds of people that push up housing prices. They are two of China’s best-run cities, offering good transport links, good jobs and, by Chinese standards, good air.
Unsold housing inventories cover just about five months of demand at the current pace of sales, indicating that more construction is needed.
Even with these strong fundamentals, it is hard to justify a 50% surge in housing prices over the past year. Regulators suspect that there has been some foul play. This week they said they would target online lenders that have made loans to homebuyers to cover their down-payments; these loans have, in theory, allowed speculators to buy homes entirely with borrowed cash, in contravention of the minimum down-payment requirements.
But reining in animal spirits is a hard task. At the Baoshan Property Trading Centre, where people buying homes in a district of northern Shanghai must go to register their purchases, crowds have swelled to such a size that the local government has deployed police to keep the peace. On one recent day a phalanx of security officers in white helmets stood guard alongside barricades as people lined up to submit their documentation. One of those queuing, Wang Jie, bought a new apartment for 2m yuan ($307,000) in October, and has watched its value soar by another 1m since then. “No one seems to buy when prices are falling,” he chuckled. “But everyone does when they start rising.”
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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