patrick.net

Jim A,

once the Chinese decide it’s time to stop bailing and get into the lifeboats, considering the huge current account deficit. So everything imported goes UP in price, and assets go DOWN in price when all the FEDs free money dissapears. With some prices going up, and some down, would we be suffering from inflation or deflation?

First, I insist the Chinese won't do this. They simply cannot afford to. Run a macro model for what would happen to their economy if they "bailed". In short, it would result in catastrophic slowdown of their great industrialization/modernization "the long march". And, it would hurt them way worse than us. Compare the percentage of US GDP derived from Chinese trade versus vice versa.

Second, although the initial shock would cause inflation in both economies, the effect would force capital out of China which would cause a rise in the dollar vis-a-vis the RMB, over a longer term. My guess is they'd suffer depreciation against the JPY and EUR concurrently as capital flees.

Instead, the Chinese--which are well known to practice long-term, strategic policy and planning--will very slowly diversify out of USD and into EUR and JPY. This is already happening. But they will still buy US debt, just in every slower amounts as a percent of the total.

To those waiting for China to commit economic suicide: don't hold your breath. (For reference, only roughly 20% of the total US GDP is derived from all global trade, so the US is in the best position to go-it-alone if things go to hell).

All that said, I still see a correction in RE. It just won't be because of China.

To clarify, the China-syndrome scenario assumes two things which are false:

1) That US does not have monetary control, and cannot set nominal rates regardless of real rates in the rest of the world. This is untrue. The US has extrodinary power to set nominal rates, and since our currency floats at market, monetary power.

2) That China does have monetary control. They simply do not. They have forfeited all monetary control to managing their currency. This is true for all pegged regimes. If China looseened or floated, then they'd lose control of capital in/outflows. This would free captial to search for better returns outside of China, which wouldn't be hard to find.

All that said, I still see a correction in RE. It just won’t be because of China.

Exactly. A bubble is mostly psychology. However, I do think mortgage rates will go up when the bubble is bursting. This may happen because of the sharp increase in risk premium.

When this thing turns there will be many things to reinforce a new trend. Reflexvity at work.

But Randy, China can and do implement policies that would be considered politically impossible here. So I think China has a lot more policy control.

China can and do implement policies that would be considered politically impossible here. So I think China has a lot more policy control.

Explain how these controlling policies would work if they loosen or float their currency. There is no free lunch. Either they eat it as hyper-inflation, they fix the RMB, or they allow free flow of capital. They can't just manufacture preferential trade without cost.

HZ,

You are correct about China running current account deficits. Also, this would help solve a lot of these problems naturally, particularly in the US.

Your second point assumes that the US and other countries allow China to play the FDI game asymetrically. I have at least enough faith in the policy makers to not allow this to happen. It is already apparent in the recent CFIUS activity relating to China. Again, if they appease CFIUS by opening restrictions in China, they'll lose equivalent capital controls. The EU has been particularly harsh on China, and I don't see them allowing the Chinese to buy real assets in the Eurozone unless China reciprocates.

H.Z,
I believe you missed my point. The point is that there are areas that are just as pleasant and unique as the SF bay. I feel a real sense here that most people just assume that " the bay area is the best" and therfore there is never any discussion about other potential opportunities. if I moved, I wouldnt feel that I was losing out on some great thing. I could easily invest my hard earned money somewhere where it actually goes somewhere, as in about 90% of the country. For now I rent because it's super cheap. But if the crash occurs, better count on those rents going through the roof. Then I'm outta here.

HZ,

I agree with your analysis. Hopefully you agree that, although there will be signficant changes afoot, the "China Syndrome" meltdown discussed here and in the pop press won't be the result. More likely there will be long-term restructuring via capital markets. Further, the contries which are free of FDI restriction in the US, excepting the EU, are also all directly impacted by US nominal rates and US monetary policies, so we have a lot of levers to pull in that regard (assuming those at the switch are smart enough to know it). As for the EU, they can't even figure out what their monetary and fiscal policy is, so I'm not worried about them in the short/mid term; anyways barriers are rising between the US and EU, not falling at the moment.

I love the negative reviews of the book that complain that Kiyosaki doesn’t give them specifics

What troubled me about his book is that, although it is correct from a high-level perspective, it lacks actionable advice. It is extremely difficult for the "common dad" to find income generating assets that produce positive FCFs, *and* are fairly priced. That is why RE is so hot. That and entreprenerial ventures are the mainstay of common investment vehicles which have the potential to produce _real_ (not just nominal) positive FCFs in excess of diversified market return. Of course, both come with extreme risk.

Further, many of common-dad have generated substantial wealth through income-driven activity. Often, a well directed career choice into a field that has barriers to entry (licensing, certification, etc.) can produce returns in excess of what is available to that individual through pure investment. Kiyosaki oversimplifies his treatment of this.

Explain how these controlling policies would work if they loosen or float their currency. There is no free lunch. Either they eat it as hyper-inflation, they fix the RMB, or they allow free flow of capital.

They will not float their currency completely. They can even have simple policies to curtail excess consumption if necessarily, by simply disallowing them. They can do incredible things that are unthinkable.

People who think it is great have obviously not travelled much.

I have travelled quite extensively, and lived in many US and foreign cities. I find the BA to be among my top 3 choices for many reasons. In the end, though, it is a personal choice. Some people prefer Evansville, Indiana; more do not.

I have travelled quite extensively, and lived in many US and foreign cities. I find the BA to be among my top 3 choices for many reasons.

I have to say that there are only 2 places that I would like to live all year long: British Columbia and the Bay Area. I cannot stand heat and humidity.

BTW, discussions are still going on in The Social Effects of the Bubble

http://patrick.net/wp/?p=87

It has 645 (!) comments though.

Given the premium one pays to live in the BA, I find it the most overrated place to live in the world.

You will be surprised how overrated many other places are.

have to say that there are only 2 places that I would like to live all year long: British Columbia and the Bay Area. I cannot stand heat and humidity.

Second that, although you'll get humidity in BC, but it just doesn't feel like the gulf coast.
I'd consider moving back up there if I didn't have family ties here.

You call that a discussion?

What would you call it?

I seriously think I’m going to buy a town home in a prime SF neighborhood at the next price trough.

Good idea. Something with a nice view. :)

Looks food fightish.

Huh? The pumpkin-pie-in-the-face kind?

The last time I checked, it is japan that is holding the majority of USD treasury. Why is everyone fearing China so much? China is extremely f*cked up in its financial system (think 60% bad debt for its banks and bad debt in the making every day), so I won't count on them becoming any substantial world power in the next 20 years at least. I have done business here, let me put it in this way, they can use a bit of basic human ethics and honesty. That's why they can ONLY compete on price, and price alone.

As of Sept, 2005, Japan still holds 600B+ USD treasury while China only holds 250B+. This is one thing that completely baffles me. Why do we keep hearing about China while in sheer economic size and prowness, it is not even close to Japan? Name a Chinese brand that you can 't live without and name a Japanese brand for that matter, it's just so crystal clear to me.

Anyway, I concur with Randy on China's action, even if they are as important of a player as the Japanese. A fast devaluating dollar will hurt China much more than us. What do we lose? A bunch of green paper, who wants more?

Most people moan and bitch abut BA simply because the cost of living is so high. If I were to pick the best spots in the world, price not being an issue, it would have been: Switzerland (plus the Italian lake district), BA, Sydney. I lived in Seattle, BC and Seattle are spectacular in scenery but just rains too much. The first year I moved to Seattle I almost sank into a depression, and mind you, that place has the highest suicidal rate in the country, not a joke!

That's why the smart parents like ourselves need to move out of USD before it crashes. There are two big bag holders called Japan and China who will continue to hold the bag for a while.

Frankly speaking, I don't give a damn if China goes belly up carrying the bag. I do feel sorry for Japanese though, hardworking people, good ethics, they don't deserve this.

For China and Japan, it beats their next best alternatives…

For China, supporting the dollar is not only their best option, it is the only viable option.

China is addicted to US sales. By selling to us they accumulate dollars. They are lending those dollars back to us at cheap nominal rates, and ultimately at negative real rates. This is a great deal for us. But they do this to meet their own needs. They MUST continue their rapid growth to avoid massive unemployment and civil unrest.

Peter P,

“It does not matter something has potential, if that potential is already priced-in or is already overpriced. It is very important to understand what the market has already discounted.”

Yes, but the prevailing assumptions change with time, so the discount changes. This creates the opportunity (at selected times) to buy cheap when the crowd is selling…
“be fearful when others are greedy, and be greedy only when others are fearful.”

The tide is shifting…

Randy H,

“I have travelled quite extensively, and lived in many US and foreign cities. I find the BA to be among my top 3 choices for many reasons.”

What are the other two?

ScotC,

Interesting mix of people. Some good and some of them were cheats and scoundrels.

One need not cheat to get ahead, but some choose that path. I find the lack of ethics of several of your charactors to be disturbing.

But I agree with you about learning how to make money. Most people never get off their asses to make it happen. …even when opportunity stares them in the face.

It really is true (at least to some extent) that you make your own luck.

What are the other two?

For me, personally:

1) Mougins, France. In Provence, near Nice.
2) Marin, SF BA.
3) Heidelberg, Germany (slightly outside, on the Neckar river). If I were to become a "rich-dad", then in a restored feudal castle.

I too, have travelled all over the world and have lived in Wyoming, San Diego, North Carolina, Montana, rural Northern California and the Bay Area.

This is the place I choose to call home, even though I could live anywhere.

There are few cities I would live in: Amsterdam, New Orleans (okay not right now), San Diego, Jerusalem and here. But San Francisco is my first choice.

It is amusing to me to see people claim that the non-whites live in "ghettos" here. That might be true for blacks and latinos, to a lesser extent, but it is not true for Asians.

Are The Richmond and Sunset ghettos? I think not. They might be a bit foggier than the rest of the city, but they have lower crime rates and better schools.

Mougins, France. In Provence, near Nice.

Nice is nice. Bouillabaisse... yum!

Here’s why I say cheats and scoundrels:

Mafia connected, tax evading, Affair with secretary….

“He keeps a house in Mission, Texas, which he declares as his permanent resident so he can avoid paying income taxes in Minnesota.”

Others evading taxes with the same trick…

“Sincerity. When you can fake that, you can sell anything.”

These points don’t inspire respect in my book. I consider these items are the behavior of cheats and scoundrels.

24′ of rain, I mean

You scared me. ;)

You know the real estate market has still a loooong way to go up when a bubblehead like yourself acknowledges that $105,000 over asking to $1.4MM for a 1,600 sqft condo isn’t that much.

I just told a friend about people bidding 400K above listing because of your previous posts. Now it is only 105K? I trusted you!

MIRAGE is always only a mirage.

"Gotta love it!"

HEAD! PANTS! NOW!

Cheers,
prat

"I think that if you have the basics in life and perhaps a steady income, that’s all you need."

Programming in ruby helps, too.

Cheers,
prat

New thread: October is here!

It’s not about you. It’s about the money. Unless or until you can understand that, the only thing you’re ever going to be is a well-paid but poor slave.

Very well said

It’s what the dollar represents that means something, money.

However, money means purchasing power. If it is not spent eventually, it has no meaning.

Jeff, thanks for your insight.

Flipping is the last hope of many people. However, all ponzi schemes will fail eventually.

ScottC,
Oh, well, at least they can’t outsource real estate.

I Thought some RE has been purchased sight unseen over the internet.
Maybe this is only the start, as the internet does allow lower marketing costs than a traditional RE office.