I've issued several warnings late last year warning of the real estate bubble peaking and popping. I feel I'm especially qualified to do such since I quite accurately called the bubble burst of 2007 - namely housing (look here and here), homebuilders (look here), commercial real estate (look here and here and here and here and there) and banks (Bear Stearns and  Lehman, among many others). Well, exactly ten years later, guest what?

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Published in BoomBustBlog
Wednesday, 20 January 2010 18:00

Some Light Shown on My Developing China Thesis

First, in today's news.
Yen Weakens Against Higher-Yielding Currencies After China Growth Quickens

Jan. 21 (Bloomberg) -- The yen declined after a Chinese report showed economic growth accelerated to the fastest pace since 2007, damping demand for Japan’s currency as a refuge.

The yen weakened against all of its 16 most-active counterparts on speculation the nation’s central bank will keep interest rates low as the economy struggles to gain momentum. The euro was near a five-month low against the dollar on concern Greece will default on its national debt as credit-default swaps on the country’s five-year sovereign bonds climbed to a record.

Wednesday, 20 January 2010 18:00

Some Light Shown on My Developing China Thesis

First, in today's news.
Yen Weakens Against Higher-Yielding Currencies After China Growth Quickens

Jan. 21 (Bloomberg) -- The yen declined after a Chinese report showed economic growth accelerated to the fastest pace since 2007, damping demand for Japan’s currency as a refuge.

The yen weakened against all of its 16 most-active counterparts on speculation the nation’s central bank will keep interest rates low as the economy struggles to gain momentum. The euro was near a five-month low against the dollar on concern Greece will default on its national debt as credit-default swaps on the country’s five-year sovereign bonds climbed to a record.

Even as the previous real estate and credit bubbles continue to deflate. I, and my team, have been going over the bank balance sheets and revenue drivers with a fine tooth comb as of late, and it is absolutely undeniable that they they don't have the asset quality and earnings power to sustain (most of their) current prices, yet many are actually rocketing higher.

This is primarily due to a slew of factors, ex. loosening of accounting standards, ZIRP (Zero Interest Rate Policy), corporate welfare (ex. TARP, PPIP, etc.), the acceptance of trash for collateral assets on the  Fed's balance sheet, QE, the simply flooding the world with money.

I understand the reasoning behind blowing a bubble within a bubble, but I vehemently disagree with its plausibility. The government hopes this bubble can be maintained until the other bubbles finish popping, but if it can't, then you will have a crash even larger than the one you were blowing bubbles in order to avoid. It's the Great Global Macro Experiment, 2.0. Practically none of the fundamental issues that have caused me to be bearish on the industrial, manufacturing, financial and banking sectors have been properly addressed and rectified. The only things that have been addressed are the symptoms caused by the actual disease. GM and Chrysler are being trimmed down, but the macro headwinds will still be there. None of the banks problems have been solved save the liquidity issue born of the fact that they failed to (and rightfully so) trust each other enough to lend interbank. The liquidity issue was a symptom of insolvency, which is still a problem that has been papered over by lies and stress-free stress tests (see Welcome to the Big Bank Bamboozle!). In addition, the securitization market is effectively dead, and to revive it would entail inducing investors to by what we now know are guaranteed losses - that is unless the government can enforce some accountability for those that create, package and sell said securities. But the issue is, if those that sell the securities are to be held responsible for them (the old skin the story), then there will be a lot less securitization going on because there are lot of consumers and corporations that simply shouldn't have been extended credit in the first place. This portends less liquidity, hence lower permanent asset prices. You see, we just can't get back to bubblistic asset pricing without a bubble. This is the government's conundrum. This is why they are (IMO, foolishly) blowing another bubble. Take it from me, the writedowns taken on the bubbled real assets and their derivatives are permanent. Let's move on... 

I am (im)patiently biding my time until this most recent government induced bubble pops, hopefully riding it down profitably. 

The majority of the money is to be made on the upside, but we cannot get to the upside until we allow the downside to play out. The government is simply kicking the can down the road. Once we are allowed to properly deflate asset prices to the point of equilibrium, then the true hard core investing can begin. Until then, I will be short and hedged all the way down.