China Housing Bubble Swells, U.S. Housing Busts (Again), Stocks Enter Correction and More!

by Addison Wiggin & Ian Mathias

May 21, 2010

  • Shades of 2008: Volatility exceeds “flash crash” levels
  • Why the rush out of stocks and commodities… Why now… And how to play it
  • Grim stats from the banking and housing sectors
  • Amid the gloom, spirit of enterprise prevails… huge scientific breakthrough
  • Readers correct us on “tar sands”


  Hmnn… yesterday, we thought snapping off a few bursts from a Chinese-made AK-47 was an interesting way to spend a Thursday afternoon.


Well, you don’t get to do this every Friday:

Click here to watch the video.

  We rode horseback to the Great Wall this morning. At the top of the Wall, we hiked past a sign that forbade tourists from entering, and found ruins… the part of the Wall that hasn’t been gussied up recently for the likes of us.

“Looks like the leftovers from the last great property bubble in China,” Fred Hsu, our friend, potential partner and local guide on this day, said.

On top of those ruins, we interviewed Joel Bowman and Chris Mayer with an iFlip about their thoughts after a week of investigating the bubble here in China … that video will be online this weekend in The Daily Reckoning.

If you don’t catch it, we’ll drop a link in The 5 on Monday.

  While wending our way down the mountain, we also learned that if you translate “Wiggin” into Pinyin — the Latinate translation of Mandarin — it’s spelled Wei-Jin… which means “danger gold.”

Considering that back in the real world it’s starting to feel a bit like 2008 again, we find “danger gold” rather fitting.

We’re not the only ones, apparently, either:

The volatility index has reached levels exceeding those after the May 6 “flash crash.”

Leave aside the Lehman meltdown and there are only three other occasions when the VIX poked its head above 45: the Russian financial crisis in 1998, the collapse of Long-Term Capital Management shortly afterward and the collapse of WorldCom in 2002.

  Result: Look out below! Both the Dow and the S&P entered correction territory yesterday — down 10% from their late April highs. On the open this morning, the Dow promptly broke through 10,000.

The classic flight to safety trade is on again, too. Ten-year Treasury notes yielded 4% at the beginning of April. Now? They’re at 3.12%.

The bond vigilantes have retreated to wherever it is bond vigilantes retreat… maybe even somewhere beyond the Great Wall.

  Markets are exhibiting "a mini-relapse of a flight to liquidity,” Bill Gross suggests, “as hedge funds and other leveraged positions are liquidated to preserve capital.”

The big money needs to raise cash. And fast. That was a process that fed on itself time and time again in the second half of 2008. And the process was well under way before the fall of Lehman in September.

Most of the commodities topped out in July and European stocks were already in a precipitous fall.

Two years ago, when we entered that decline, Dan Amoss made some of his most profitable put-option plays for Strategic Short Report: 161% gains on Allied Capital, 220% on PNC and 462% on Lehman.

Dan’s next recommendation comes out this afternoon not long after you read this. You can access it for just $1. As soon as you sign up, you’ll get a username and password. Log into the members-only site and keep an eye peeled for the new alert.

  It’s not just stocks, of course. Gold clings this morning to $1,175. Oil is below $70. The dollar index has fallen back to 85.5. The euro regained $1.25. And the Canadian dollar is back up to 94 cents.

  The fun might not be over. EU finance ministers have begun meeting in Brussels. On a Friday. We wouldn’t be surprised to see some sort of Sunday announcement, like the $1 trillion “stability fund” two weeks ago… or the host of Sunday announcements we got from Hank Paulson in 2008.

  Still, we doubt this week’s pullback in gold is scaring John Paulson out of his gold positions. They grew in the first quarter of this year… again.

According to Paulson & Co.’s latest 13-F, his No. 1 holding, the GLD ETF, is unchanged from the previous quarter. But he added to his positions in gold miners like AngloGold Ashanti and Kinross. Our Byron King likes those firms, too.

  Another reason to like gold? The FDIC’s “problem bank” list expanded again in the first quarter of this year. The total now is 775. That’s 10% higher than the previous quarter… when the number grew by 27%. So we’re still bleeding, just not as profusely.

The numbers are included in a report on the overall state of the banking industry, which crows about growing earnings numbers. That’s fine as far as it goes, but…

  • Most of that improvement owes to the banks cutting the amount of money set aside for loan losses
  • The banks cutting their loss reserves most aggressively are the biggest ones, that is, the too-big-to-fail set…


The FDIC’s insurance fund is still in the red, but not quite as much as it was three months ago.

This paper dragon can probably remain uncombusted if interest rates remain low… and if Fannie, Freddie and the FHA can keep propping up the housing market. Those are big “ifs”.

As it is, the downward pressure on the housing market remains intense…

  Roughly 10% of mortgages were delinquent in the first quarter, and roughly another 5% were in foreclosure, according to the Mortgage Bankers Association. Seasonal adjustments muddy the figures a bit, but no matter how you slice it, it’s as ugly as the horse in front of you stopping to relieve himself on the trail.

  Then there’s the latest laundry list of failure from HAMP, the government’s Home Affordable Modification Program.

  • In April, over 122,000 borrowers had their trial modifications canceled. That’s 40% of all the cancellations since the program began a year ago. We’re talking 277,640 total cancellations… compared with 295,348 that actually made it through to permanent modifications
  • Among those permanent modifications, the typical borrower’s “back-end” debt ratio (mortgage plus credit cards, car payments, student loans, etc.) rose last month from 61% to 64% of pretax income. Yeah, that’s sustainable.

  No surprise here, demand for new mortgages plunged to a 13-year low after the homebuyer tax credit expired at the end of April.

  A few more data points about China’s torrid housing market emerged this morning, too:

  • Home prices in major cities rose 12.8% in April — the third straight monthly double-digit rise
  • Here in Beijing, the authorities have limited families to one new condo purchase. In tandem with other measures announced at the end of April, prices have since fallen an average 10-15%
  • So a 970-square-foot condo will still set you back a good $250,000… on an average annual income here of $3,915.

We had dinner with the Chinese director of one of the Big 5 consulting firms this evening. Even he says, “You can do no wrong” when it comes to real estate in China. With only one eyebrow raised, we glanced at Bill Bonner, who was seated on the other side of the gentleman. The utterance sounded suspiciously like what we were hearing in the U.S. circa 2005-2006.

  Yet for all the grim news we heard on the radio in the car ride back from the Wall today, we also caught this: Private-sector scientists led by Craig Venter have developed the first living cell controlled by synthetic DNA. Patrick Cox must be having a conniption fit, we recall thinking.

"We've now been able to take our synthetic chromosome and transplant it into a recipient cell — a different organism,” Venter explained. "As soon as this new software goes into the cell, the cell reads [it] and converts into the species specified in that genetic code."

This opens up endless possibilities… vaccines, drugs, fuels, even a new way to clean up pollutants.

You’ll recall, it was Venter and his team who cracked the human genome in 2000, long before government scientists could figure it out. Ten years later, they’ve made another world-changing breakthrough.

Watch for Patrick’s update and analysis early next week right here in The 5.

  “Your May 20 Forecast persisted in referring to the Western provinces' oil sands as the ‘tar sands,’” a reader complains. “This term is inaccurate and is used extensively by ‘green’ wackos. There's oil in them thar sands, not tar.”

The 5: Seriously, we weren’t aware it had become pejorative. Does it really matter? It’s used by everyone in the oil patch, including our own Byron King, to distinguish it from light sweet crude.

  “Love what you guys bring each day,” writes another piling on. “Just one correction to your comment on the oil sands. Big existing oil sands installations are very economical. The cost of production at Suncor and Syncrude, by far the biggest oil sand producers, is $30-35 per barrel and $20-25 per barrel, respectively.

“Only new projects are coming in at the $70-90 per barrel level.”

The 5: Thanks for pointing out the distinction. Still, we wouldn’t be surprised to see the Chinese buy in after the Canadian delegation leaves town this week. In other deals around the world, China has demonstrated a willingness to pay above-market prices to ensure a reliable supply. That usually gets the deal done… that and the many cups of bai-jo you are encouraged to imbibe when doing business here.

  “I’m amazed,” writes a new member of the Agora Financial Equity Reserve, “that I’m enjoying the services I hadn’t considered subscribing to MORE than the ones I already subscribed to before joining.”

“The video was very informative and well-produced,” writes another. “I have not made a lot of trades to date, but the ones I have made are all in the green.”

This is your last call for access to the Equity Reserve: Just $1 gives you access to all our stock-picking services, plus the exclusive video 7 Emergency Stocks to Own Right Now. This offer expires tonight at midnight. After that it won’t be available at any price, much less $1. Check it out here.

So long from Beijing,

Addison Wei-Jin
The 5 Min. Forecast

P.S. Dan Amoss described his latest short as “a company in secular decline and very exposed to weakness in both the euro currency and eurozone economies.” He hasn’t even disclosed it to me yet. But then again, I’ve been preoccupied with equestrian pursuits, and not strapped to the laptop this fine day.

You, however, can get his next play as soon as it’s posted on the members-only website this afternoon. Grab your $1 trial of Strategic Short Report here.


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