If it sounds too good, it is a Ponzi scheme

Many investors still have illusions about investing in China, especially Chinese who know relatively less about the outside word and who have the blind confidence about government’s ability to eventually clean the mess. Their number is smaller compared to the time when I start to turn bearish on China. For example, many still boast to me about how much return they are getting on their wealth management products. However, they just do not have common sense (if you read this blog and find me to be too arrogant, that is because 1) as I said a long time ago, you need to take a strong stand to be heard; 2) there are just too many irrationality in investors, many of them are just smart people.) The returns they get could be easily between 6-10%. If you add 1-2% for the transaction costs, the borrowers have to pay easily about 8%. For an equity holder who takes more risks, unless they make higher returns than fixed income claim holders, say 10% or much more if you understand how much hassles are to do business in China, otherwise why would they take the additional risks? But have you ever seen many projects returning that high in China today? So why not just invest in wealth management products as well and get the safe 6-10% returns, which means no one is out there generating wealth anymore. A friend told me that years ago, it is very hard to drive through the main drag in Dongguang, an industrial capital in Pearl Delta. Now he can zoom through by stepping on the gas without any release in the matter of minutes.

By the end of next years, but probably earlier, we will hear cries and see tears in those wealth management products.

The US will take a while longer to recover

Just a few months of relatively positive news, the sillies at the Fed already start to make noise about taking “unlimited” QE away. It is really not unlimited, and should be much larger. Taking it away earlier would only send Treasury yield down eventually before the Fed has come back to do even bigger “unlimited” QE again (bigger unlimited, see how silly it is). This reminds me of my visit to the Fed in early 2011. Everyone I met there tells me how they are preparing and proposing the mechanisms to take away QE liquidity (note that this means to stop QE, and also reverse it). Two years down the road we are still in bigger unlimited QE. For the US to recover with the half hearted decision makers and the constant distraction from the Republican side, it may take to 2015 for the economy to be on real sound footing. Fortunately, I do not think the detractors at the Fed will succeed, at least not this year. Unfortunately, it means bubbles in HK and many other places in the world will take longer to burst.

After the recovery is on sound footing, then it is the time to think about dealing with deficit.

Hold on to your stocks

I trust you have made money by following my blog.

I meant to post this a week ago for two reasons. First, I have told this to everyone I met since the last post in the last September, including a few conferences in which I was a speaker. These include the funny period of people dumping stocks after Obama is elected, and the overly concern about fiscal cliff. Many do not understand the Obama’s election means this recovery will not be derailed. Fiscal cliff will be a little bump in the road anyway.

Second, I see risks popping up, but markets still should have runs, which means the returns from this point will be bumpy. Then after some more time, we will see some dive again (the sure thing, which is not a risk, is China’s economic dive). What are the current risks? Although European crisis has abated, including some positive steps to further forgive debt in Ireland, the austerity stance has not eased and will lead to further economic contractions. China will start to put some brakes on housing price increases, and likely will start to slow down further by the end of the year (I had some friends calling me that the Chinese housing markets will be wonderful again but I told them that the central government will not allow that, which will set up the fall after all the speculators start to depart). A few Fed sillies who argue for early ending of QE will only set up for more QE later, after economy fail again, but I do not think they can change the course of the QE this year. The market seems to focus on this last event in the last couple of days, which is a good time to buy.

Hong Kong, International Financial Center or China’s International Financial Center in the next decade or two

A couple of months ago, I was sitting at a conference after I spoke and the panel was discussing whether Hong Kong could become an international financial center on par of NYC and London. Afterwards, some email me what I think of this question. I responded the following:

The only thing the panel really discusses is how Hong Kong could serve China. China is a big fish, so just China is a lot to feed. But with this mentality, it hard to see HK become a real international financial center like NYC and London. HK's financiers and government officials generally do not have a grand view. British was making the decision for them. Now, other than doing as little as they can, they are also largely influenced by Beijing. So it is not surprising that HK cannot have the longer term view that Singapore (SG) government might have. So if China slows down in the future (and US recovers), HK will have a hard time. For SG, the bigger picture is much better if they know how to play it. They are part of the China story, but they are also part of India, and Southeast Asian stories, which probably will be the next stories to unfold, except that no one knows the timing and catalyst.

For either to become an international financial center rivaling NYC and London, another battle they need to fight decisively is with Western countries and firms. For now, most financial functions in Asia involve channeling money to North America and Europe, instead of having the money to be managed in Asia. So they are just satellite centers serving NYC and London. As long as this situation lasts, there is no hope for them to become real international financial center. But I do not see this happening any time soon. Even Asians or their governments are not helping. If you do not believe it, look at all the capital flight from Mainland China and the reason leading to that.

Can China not slow down?

I have told my students all the time that there is one thing on China’s side because Japan is already at the tech frontier, whereas China can still bring up per capita GDP even if working age population or total population shrinks. That could still bring China’s overall GDP to positive growth even with population shrinks, even if the huge gravity of shrinking working age population. But that also requires China to release its human capital to allow and facilitate its citizens to gain access to information and pursue their own ambitions. Currently a large part of this system is not there and the system is actually getting worse. So it is possible for China to get stuck at mid income as well. Lower income never means higher growth; it means potential for higher growth ;=).