Tuesday May 17, 2005 - 11:20:38 GMT
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Black Swan Capital - www.blackswantrading.com
“Price increases, which are called into existence by an increase in the quantity of money, do not appear overnight. A certain amount of time passes before they appear.
Ludwig von Mises
Should we be concerned about this? It is from Mr. Andy Xie, Morgan Stanley economist:
“The latest [Chinese government] announcement of the property ‘cooling’ measures has hit a nerve. The mere fact that the new measures have come out so soon after the previous measures suggests that the government is committed to cooling the market. Some speculators are beginning to liquidate. Until now, transactions have tended to drag on, as sellers have kept raising the price during the settlement process. Now, many sellers have become anxious to close transactions.
“There is no panic in the market yet – which bodes well for a soft landing in Shanghai. If speculators hesitate to sell, they should be stuck when the prices normalise.”
The key phrase I see is “no panic yet.”
If property speculators do panic, it probably means more trouble for Chinese banks. It would further tarnish the state “banks” (read, central government distribution conduits), that are currently be scrubbed down and buffed up for a round of Initial Public Offerings (IPO’s). From the outside looking in, one would ask: Why worry about property prices now when you are busy preparing the banks for sale? Your average major global financial house probably would have counseled—get the money first (IPO’s), worry about the real problems later.
The fact that the Chinese government has chosen to cool the property market is probably a sign of either: a) the bubble is worse than we know, and/or b) the average Chinese citizen cannot come close to affording housing, which has turned into primarily a rich speculators game fueled by foreigners, and it’s creating more social tension than we realize.
“A crash is a collapse of the prices of assets, or perhaps the failure of an important firm or bank.
“…The system is one of positive feedback. A fall in prices reduces the value of collateral and induces banks to call loans or refuse new ones, causing mercantile houses to sell commodities, households to sell securities, industry to postpone borrowing, and prices to fall still further. Further declines in collateral leads to more liquidation. If firms fail, the bank loans go bad, and then banks fail. As banks fail, depositors withdraw their money. Deposit withdraws require more loans to be called, more securities to be sold. Merchant houses, industrial firms, investors, banks in need of ready cash—all sell off their worst securities if they can, their best if they have to.”
The above is the anatomy of a crash and panic from Charles Kindleberger’s classic: Manias, Panics, and Crashes. I think what Kindleberger does so well in this short synopsis is show the power of the systems “positive feedback” in perpetuating a crisis.
I have been reading a lot of hedge fund crowd public relations cronies lately talk about how another Long Term Capital Management type of situation couldn’t happen now because the current crop of hedge fund managers employ excellent risk management. They have “stress tested” their portfolios for all types of environments (read controlled virtual reality). This type of talk should fall into the category of: Do you really think we are stupid enough to believe that?
So back to the original question: Should we be concerned about Chinese efforts to cool the property market? If you believe that economics starts with human action, and not econometric modeling, you bet you should be concerned.
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