Evidence Investing

I'm slammed today, but I just wanted to check in real quick...a little more 'op-ed-ish' than I like for this site, but I think its useful anyway...

I'm going to reach back a few weeks to tie something together for you:

First take a quick look at this post from a few weeks ago about the bubble in Chinese real-estate .  I'm going to repost the graph here:

Now, check out this article from Bloomburg (which I have summarized):

China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term Capital Management. 

The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, he said.  “[It] is the greatest bubble in history with the most massive misallocation of wealth.” China “is a bubble waiting to burst.”   Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy.

The Shanghai Composite Index of stocks jumped 80% last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009. The Index is valued at 32 times reported earnings, compared with 52 times at its peak in October 2007. The U.S. benchmark Standard & Poor’s 500 Index trades at 19 times earnings. China’s economic growth quickened to 10.7 percent last quarter. Property prices in 70 cities rose 10.7 percent from a year earlier in February. 

REFER TO ABOVE GRAPH!!!  J

The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, says the World Bank. 

Harvard’s Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd., predicted a slump after excessive property investments. 

Now, there are some economic heavies on the other side, for sure, all of them saying that the Chinese central bankers will raise rates high enough and quick enough.
 
The banking industry has “very low impairment charges compared to what you’d expect this time in the cycle,” HSBC’s Geoghegan said. “I wouldn’t be surprised if there’s a gradual increase in impairments, but long term I’m confident that the structure of the banking industry is very, very sound.” 

I guess we will see, Mr. Geoghegan…but that chart up there is pretty convincing J