China Bubble v2.0, The Return of Toxic Assets, MENA Nations and More!

by Addison Wiggin & Ian Mathias

  • China goes from boom to bubble… Dan Amoss on if and when to go short
  • Chris Mayer with a new emerging acronym: Are you investing in MENA?
  • Banks reclaim public ire: Toxic assets sour as banks reap record overdraft fees
  • All asset classes pull back… why even gold can’t thrive this week


  How do you say bubble in Mandarin?

Chinese property sales are up over 60% so far this year, the nation’s National Bureau of Statistics proclaimed yesterday. That puts the housing bubble here to shame. We’ve heard a bunch of nosebleed data points come outta there in the last few weeks… check these out:

  • New loan issuance has tripled in the first half of 2009, to $1.1 trillion. That’s more than half of the entire Chinese GDP over the same period.
  • 95% of those loans went to state-owned enterprises or provincial entities
  • The Shanghai Composite is up 79% year to date, the best major market performance in the world
  • Stocks on the Shanghai Composite trade for 35.4 times earnings, double that of the MSCI Emerging Markets index
  • M2 money supply rose over 28.5% in the first half of the year
  • The seven largest bond sales in the world this year were domestic transactions in China.

Damn near everything is up dramatically in China in 2009… except exports. Strangely, we don’t hear a lot of concern that the backbone of their economy has contracted 23% since this time last year.

  “The Chinese government realizes,” adds Dan Amoss, “that its stimulus spending and pressure on banks to expand lending is inflating a massive bubble in the Chinese stock and property markets. The problem with unsustainable economy activity is, of course, that it must eventually end.

“But for now, the Chinese have much more room to borrow and inflate than the United States (which has spent the last few decades doing so). Eventually, the market will cut them off. The end will not be pretty, and at some point in the future, shorting Chinese stocks may be one of the best short-selling opportunities in history.

“In the meantime, it makes no sense to bet against China. The Communist government has proven very efficient at stealing the resources of its people (via inflation and taxation) and channeling them into whatever infrastructure project they deem necessary.

“This process could end next week or next year.”

Dan’s keeping an eye on China, but right now his focus is on a very well-known bank on the other side of the Pacific. He believes this major financial player will soon have to cut their dividend… crushing their stock price.

He’s put together a fine report on this new short target. It’s so good, we’re going to sell it for just $1. Once you experience his analysis, we’re convinced you’ll stick around. So keep your eyes open… we’ll be sending you details tonight.


  While China bubbles up, its BRIC-brother Russia is melting down. Russian GDP contracted a record 10.9% annualized pace in the second quarter, the Russian government announced this morning. The world just doesn’t want oil and natural gas like it used to, and that’s really the only game in Mother Russia.

“We can’t develop like this any longer,” President Dmitry Medvedev said yesterday. “It’s a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy.”

  So if the BRIC nations are giving you pause, check out MENA.

“I’m talking about the Middle East and North Africa, or MENA,” says Chris Mayer.

“In one of my presentations at Vancouver, I focused on the growth in these economies because it touches on nearly everything I’ve been telling my Capital & Crisis readers lately — water and food scarcity issues, infrastructure needs, energy and the growth in non-U.S. trade.

“MENA is one of the fastest-growing regions in the world. Over the last 50 years, MENA’s population is up more than fourfold. And the population is still young, with the majority of the population under 25 years old. Over the next 30 years, MENA’s population will grow more than 60%, to nearly 700 million people. Trade there is expanding just as quickly.

“The most interesting thing about this growth is that it is happening in a part of the world where it is most difficult to grow food. Water is scarce. MENA consumes far more water than it gets via rainfall. In some places, the disparity is dramatic. In Kuwait, for instance, annual water consumption is 22 times annual rainfall. No wonder the whole area is a net importer of food.

“The Middle East is actually the world’s largest regional importer of food. Egypt, for instance, actually imports more wheat than China. The GCC countries — or gulf coast countries — will import 60% of their food by 2010. And it’s likely to get worse. Saudi Arabia aims to phase out wheat production by 2016 to conserve water.

“The key takeaway from all of this is to recognize this other, non-BRIC, growth engine and the needs and opportunities it creates. Once again, we’ll see enormous investment in food and water resources to feed and slake the thirst of all these people. And we’ll need all of the infrastructure and burn all of the hydrocarbons that come with that growth.”

Chris has loaded up the Capital & Crisis portfolio with companies that will benefit from the rise of MENA… get details here.

  Back in the States, up to 30% of U.S. mortgages will be underwater by mid-2010, says a report from The real estate data collector estimates that nearly 25% of mortgage holders currently owe more than their home is worth. Coupled with Deutsche Banks’ prediction for 48% of mortgages underwater by 2011, the chorus of real estate woes is growing again. In short, the housing bottom is yet to arrive.

  "If the economy worsens," reads a Congressional report this morning, “then defaults will rise and the troubled assets will continue to deteriorate in value. If the losses are severe enough, some financial institutions may be forced to cease operations."

Remember those “toxic assets” festering on bank balance sheets? The media has forgotten about them, as “green shoots” has become the catchphrase du jour. But the Congressional Oversight Panel that’s been assigned to the matter said today that the bad asset crisis is as hot as ever.

“No one has a good handle how much is out there," Chairwoman Elizabeth Warren said. "Here we are 10 months into this crisis… and we can’t tell you what the dollar value is." No offense to Ms. Warren, but she must be one of the most qualified people in the world on this subject… and she has no idea.

The panel estimates that banks in America have up to $1.5 trillion in “tier-3 assets” — the kind of securities that neither banks nor legislators have the stones to value. There was $657 billion worth of the stuff in the 19 too-big-to-fail banks at the end of their stress tests in the first quarter of 2009. That’s actually a 14% rise from the end of 2008.

The Treasury still promises to combat this coming crisis with the infamous Public-Private Investment Program (PPIP), a concept that’s done little more than give traders a rash and libertarians an ulcer. But so far we love the PPIP… unveiled in March, it’s yet to spend a single dollar on toxic assets. Keep it up!

  American banks will collect a record $38.5 billion in overdraft fees this year, says research company Moebs Services today. That’s nearly double the record of $19.9 billion set in 2000. Interestingly, 10% of the population accounts for 90% of the fees… most of whom have credit scores below 590. 

Only one American data point today: U.S. worker productivity soared at an annualized rate of 6.4% in the second quarter, says the Labor Department. That’s the biggest jump in six years.

“Makes sense,” quips Byron King. “All the layoffs kick in, so the work is getting done by fewer people with more, ummm, ’motivation’ not to join the ranks of the pink-slipped. Hardly a promising sign.”

  Just about every asset class is pulling back today. Major stock indexes fell about 1% soon after opening this morning… the “bull market” seems to be waiting for word from the Fed, due out tomorrow.

  Commodities are just a bit lower, too. Oil’s down for the third day in a row, to $69 a barrel. Gold’s down another couple bucks, to $944 an ounce.

“It is not surprising,” writes James Turk of, “that gold and silver began this week with some ‘backing & filling’ to build support, given how well they have done since their July 8th low. In terms of U.S. dollars, gold and silver have risen 4.0% and 11.7% respectively, which is enough reason for them to take a rest.

“Another reason is the Federal Open Market Committee meeting scheduled for this week. A rising gold price during that meeting would make clear the hollow rhetoric coming from policymakers that inflation is not a problem, and no one at the Fed wants to be embarrassed like that. So enter the gold cartel…

“Importantly, the long-term picture for gold remains very bullish as the dollar continues to be debased by out-of-control spending by the federal government that is leading to record deficits, record amounts of debt and record monetizing by the Federal Reserve. These factors all suggest a much higher gold price in the near future.”

  The dollar is one of the few “winners” of today. It’s managing to hold onto big gains from Friday’s jobs report. The dollar index is at 79.2, just a few tenths of a point below Monday’s high.

  “You guys do such a fantastic job,” writes a reader, off to a pleasant start, “of reviewing the economic reports that it is a rarity that you miss something — but you may have in your analysis of Friday’s unemployment report.

“It was hidden, to be sure.  But if you listened to [White House economic adviser Christina] Romer’s interview on the decline in unemployment, she admitted upfront that the sole reason for the decline was because 422,000 people left the labor force because they were too frustrated to look for a job.  That’s hardly evidence of a recovery!!  Romer and other administration officials still expect unemployment to peak over 10% next year. 

“Maybe Bonner will have his revenge this fall yet.”

The 5: That is some nice fine print. Thanks for the heads up. Employment “discouragement,” as they like to call it, isn’t the only reason the labor force shrinks. But we hear you… something ain’t right when the economy loses a quarter of a million jobs and the unemployment rate drops.  

  “I am a pacifist and very peaceful person,” a reader writes, “but after reading about the government jets program you mentioned yesterday, I am ready to reconsider my stand on violence against…  fellow human beings and especially the members of Congress.

“In all seriousness, all this reckless spending by our government makes my blood boil, and I can see how or why the French peasants got the guillotine out when their royalty was living lavishly while the peasants were struggling. I don’t think there is going to be a violent end to this in [the] U.S., but I can now see that most peaceful people can snap back if pushed too far. We the people are violent animals after all!”

  “Will it be possible,” another reader asks, “for you to identify the individual Congress members that vote for the purchase of these new jets?  This is almost like the straw that breaks the camel’s back.”

The 5: Sure, it’s right here. It was snuck in a huge defense spending bill. The good news is that the House abandoned its plan to buy these jets yesterday, after public outrage like yours had Representatives backpedaling.  Here’s to small victories.


Ian Mathias

The 5 Min. Forecast

P.S. Want to retire 30 days from today? With some speculative cash, some “flash action” trading and a bit of luck, it’s possible. Of course this kind of trading isn’t for everyone… but if you’re looking for moonshot profit opportunities, we’ve put together the report for you. Check it out here.


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