patrick.net

As to deflation being “awesome” for you…be careful what you wish for. Deflation is generally not good for anyone except far-left and far-right agitators.

See, opportunities still!

Randy, do not look at China as a free market economy. It will *always* be controlled by the government and personally I think they have no interest in *capitalism* at all. I believe they are leveraging a market-economy to implement their version of socialism.

Randy, thanks for your input. I will never buy CNY as a hedge because China is too dependent on us as a buying market, if we fall, the first country to perish will not be us, but them. Also, I believe that China has a lot of structural problems it needs to resolve if it were to repeat Japan's success, which I highly doubt. CNN reported the other day that the most fertile part of China, Southern China, where most of the GDP is generated, has only enough water to sustain its population for another 40 years. China's per capita potable water is 1/3 of world's average, among other catastrophic environmental problems. I will never bet on a country which has a survival issue.

The problem for us the bears as a whole is, where to park our money? Since we have been acting responsibly with our hard-earned cash, I'd hate to see us not taking advantage of the bubble burst as much as we can. The nightmare situation for us is to see a domestic inflation which will sustain the current home price at the nominal value, so if we hold USD, we don't really gain anything by choosing not to participate in the fool's game. It is also beyond my imagination how we can print more money without USD depreciation. So for me, the best way for us cash-rich investors to take advantage of the situation is to hold a basket of foreign currencies or commodities so when USD does go down quite drastically, we shall benefit from exchanging our fx back into USD to buy homes at USD-denominated price. The question is, how far will USD fall?

Btw, are you guys aware that there are already some bear funds out there that are betting against mortgage companies (some of which are down 3%-5%)? If you truely believe in what you say here, might as well put your money where you mouth is.

The reason why I won't buy CNY is because I lived in China as an expat and still have lots of contacts there, so I know that place inside out. The financial sector of that country is completely rotten. It is a place to make quick bucks, that's about it, but remember to take your money and run. The long-term prospect of China is very much in doubt. Plus, how do I take profit on a non-convertible currency? I have quite a few very rich Chinese friends who share the same opinion, they all have businesses in China, but left their families and most of their fotunes outside of that country. That in itself says a lot.

The answer is, gold. Gold is the only thing that cannot increase in supply easily and everybody hoards when currency system is in turmoil. Just look at what happened to gold price in 1980s, today's gold spot still has a long way to go.

Also, China is no Japan, it won't be Japan for a long time. Japan is technologically much more advanced than China when it was in the comparable period of 1970s. The contemporary Chinese who were born in the late 1970s and early 80s save as little as the Americans, how do you think one can afford a car in China? Car loans. Do you know what the latest default rate on car loans in China is? 10x the American default rate. That is a country that looks good today but will disappear the moment their main backer, America, runs into problems. The way to hedge against the fall of USD is to find a country / countries with the least economic ties with us, namely, the Europeans, Scandinavians or even the Russians. The entire Asian economy is dependent on us, so I won't hedge against a free fall of USD with any Asian currencies as a general principal.

Investment IS about psychology. Why does one need to spend a MILLION to live in a squatter hut in BA? That is about psychology. Why does one need to pay hundreds of P/E for GOOG? Again, psychology.

The root of the problem is, there is way too much USD floating around. When there is too much paper in circulation, there will be inflation. But China's cheap labor and export-oriented policy has ensured that we don't get inflation in goods that can be imported or services that can be outsourced. However, whatever paper USD is left unconsumed will have to start chasing items/assets that cannot be outsourced, and commodities that cannot be increased in quantity as fast, namely, homes, medical service, education expense, food, commodities and precious metals. It is a simple economic phenomenan of lots of SOMETHING chasing limited quantity of SOMETHING. The price of whichever in scarce quantity will go up, and that of whichever in abundant quantity shall go down.

What is the value of USD? It is just paper that is backed by "in God we trust", or shall I say, in AG we trust? Economics is a study of relative scarcity and group psychology.

That is about psychology. Why does one need to pay hundreds of P/E for GOOG? Again, psychology.

Yes, greed is GOOG.

No, I am not suggesting that we will ever go back to gold standard, that is quite impractical. However, in this era of irresponsible money printing, people will start to increase the % of gold in their portfolio. Before we jumped on this bandwagon of free money, I had 0% in gold in my porfolio. Now I have 14%, and still plan to increase to about 25%. Same thing is happening to other friends of mine who are thinking of hedging against the free fall of USD because it is long overdue.

I am sure lots of new gold bugs were lately manufactured because of this Katrina rebuilding effort + no tax raise nonsense. You just can't turn on the printer 24x7 expecting everything to stay constant. Sooner or later, USD will be worth less than the paper that the denomination is printed on.