Pretty harsh words from former Morgan Stanley Analyst Andy Xie:

“Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.”

Continues after the jump . . .

Since the low set late 2008, the Shanghai Index is up nearly 100% . . .



Famed market analyst says China has “become a giant Ponzi scheme”
Aug 3, 2009
Monday, August 03, 2009

Liquidity isn’t a constraint yet. Even though loans grew by 24.4% in the first half or Rmb 7.4 trillion, loan-deposit ratio increased only to 66.6% in June 2009 from 65% in December 2008. It means that many loans have not been spent in real economic activities and have merely supplied leverage for asset market transactions. China’s property market is very similar to Hong Kong’s in 1997.

The origin of the asset bubble in China is excess liquidity as reflected in high level of foreign exchange reserves and low loan deposit ratio. The low interbank rate defines how serious excess liquidity s. The massive buildup of liquidity in China was due to weak dollar and strong exports. As dollar entered a bear market in 2002, China’s Rmb followed it down. The appreciation expectation drove liquidity to China. One fourth of China’s foreign exchange reserves could be due to this factor.

China’s productivity rose rapidly after it joined the WTO. The massive buildup in infrastructure and the relocation of manufacturing sector to China pushed up Chinese labor’s productivity rapidly. At the same time, Chinese currency declined as it rose against the dollar less than its decline. The combination of rising productivity and weak currency led to the massive export growth. The resulting dollar earnings pumped up China’s monetary system.

While China is experiencing weak exports now, the weak dollar allows China to release the liquidity saved up during the boom in the past five year without worrying about currency depreciation. How far would the bubble go and for how long?

It is not too hard to understand when the bubble would burst. When the dollar becomes strong again, liquidity could leave China sufficiently to pop the bubble. What’s occurring in China now is no different from what happened in other emerging markets before. Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst.

It is difficult to tell when the dollar will turn around. The dollar went into a bear market in 1985 after the Plaza Accord and bottomed ten years later in 1995. It then went into a bull market for seven years. The current dollar bear market began in 2002. The dollar index (‘DXY’) has lost about 35% value since. If the last bear market is of useful guidance, the current one could last until 2012. But, there is no guarantee. The IT revolution began the last dollar bull market. The odds are that another technological revolution is needed for the dollar to enter a sustainable bull market.

However, monetary policy could start a short but powerful bull market for the dollar. In the early 1980s Paul Volker, the Fed Chairman then, increased interest rate to double digit rate to contain inflation. The dollar rallied very hard afterwards. Latin American crisis had a lot to do with that.

The current situation resembles then. Like in the 1970s the Fed is denying the inflation risk due to its loose monetary policy. The longer the Fed waits, the higher the inflation will peak. When inflation starts to accelerate, it would cause panic in financial markets. To calm the markets, the Fed has to tighten aggressively, probably excessively, which would lead to a massive dollar rally. This would be the worst possible situation: a strong dollar and a weak US economy. China’s asset markets and the economy would almost surely go into a hard landing.

How far the bubble would go depends on the government’s liquidity policy. The current bubble wave is very much driven by the government encouraging banks to lend and the super low interbank interest rate. As the Fed’s interest rate is zero, the dollar is weak, China’s foreign exchange reserves are high, and the loan deposit ratio is low, China could increase liquidity, which would expand the bubble further. However, other considerations may motivate the government to cool it off.

If the government pumps all the liquidity it can, it wouldn’t have any ammunition left to revive it when it comes down. If the global economy has revived then, Chinese economy may have a soft landing with strong exports. The asset markets will certainly have a hard landing. However, if the global economy remains weak then, which is my view, both asset markets and the economy would have a hard landing. The political cost may be too great for the government to risk it all now.
A less risky approach is to adopt a stop-and-go approach. The government releases a wave of liquidity like now and then turns off the tap. Markets will run out of steam when it is all absorbed. When markets fall low enough, the government could release another wave to revive them. This approach makes the ammunition last and limit the bubble size, which contains the damage when the bubble eventually bursts. I suspect that that would be the government’s policy. If the global downturn remains for the next few years, we could see that China’s property and stock market experience big fluctuations every year. The downward movement of the current wave may happen around the National Day.

Many would argue that China isn’t experiencing a bubble. The high asset prices just reflect China’s high growth potential. One can never make an ironclad case to pin down an asset boom as a bubble. An element of judgment based on experience is inevitable when one calls a market boom a bubble. I have had a reasonably good record at calling bubbles in the past. I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s, a long report at the World Bank in earl 1990s arguing that Southeast Asia was a bubble, research notes at Morgan Stanley in 1999 calling dotcom boom a bubble, and numerous research notes from 2003 onwards arguing that the US property market was a bubble. On the other hand I have never called something a bubble that turned out not to be a bubble.

I want to make myself perfectly clear on China’s asset markets today. They are a big bubble. Its bursting will bring very bad consequences for the country. However, as so many are enjoying what’s going on, I don’t think the government would act preemptively to eliminate the bubble. Indeed, many, if not the majority, in the policy circle argue that the bubble is good for reviving the economy. This sort of thinking seems to work because the dollar is weak, as the bubble can be revived with more liquidity when it cools off. When the dollar revives, China’s asset markets and, probably, the economy would have a hard landing. I hope that the people who advocate the benefits of the bubble would stand up then to accept the responsibilities for the damages.

The most basic approach in studying bubbles is to look at valuation. For property the most important measures are price to income ratio and rental yield. China’s average price per square meter nationwide is quite close to the average in the US. The US’s per capita income is seven times China’s urban per capita income. The nationwide average price is about three months of salary per square meter, probably the highest in the world. As far as I can tell, a lot of properties can’t be rented out at all. Those that can bring in 3% yield, barely compensating for depreciation. The average rental yield, if one including those that can’t be rented out, is probably negligible. China’s property price doesn’t make sense from affordability or yield perspective. Some argue that China’s property is always like this: appreciation is the return. This is not true. The property market dropped dramatically from 1995-2001 during a strong dollar period.

A special angle in China’s property bubble is its role in local government finance. As land sales and taxes from property sales account for a big portion of local government revenues, they have powerful incentives to pump up the property market. Land sales are often carefully managed to spike up expectation. For example, those who bid extraordinarily high prices for land are laurelled as land kings. Lately, the land kings are often state-owned enterprises. When state-owned enterprises borrow from state owned band and give the money to local governments at land auctions, why should the prices be meaningful? The money circulates within the big government pocket. Tomorrow’s non-performing loans, if land prices collapse, are just today’s fiscal revenues. If private developers follow the SoEs to chase the skyrocketing land market, they could be committing suicide.

The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn’t last. The turning points in China are often related to political calendar. Retail investors hold the popular belief that the government won’t let the market drop before October 1, the 60th anniversary of the PRC. Last time it was the 17th Party Congress in October 2007. This sort of belief is self-fulfilling in the short term. The market tends to roll over around the time. If the past is of meaningful guidance, this wave will taper off before October.

The idea that the government wouldn’t let the market drop is rooted in Chinese market psychology. In financial jargon, it is called a put option. During the Greenspan era, financial markets believed that he would always bail out markets in a crisis, which was the so-called Greenspan put. The belief in China should be called the Panda put. However, in reality, the government couldn’t reverse the market trend when it turns. Chinese stock market has big ups and downs in the past, which shows the government’s inability to stop the market from falling. Nevertheless, this imaginary put option remains deeply rooted in popular psychology.

Many policy thinkers believe that bubbles are not that harmful. One popular theory is that in a bubble money is passed from one person to another and, as long as it remains in China, no permanent harms can be done. Hence, if people are happy now and unhappy tomorrow, they just cancel each other. They should look at Japan and Hong Kong to see how much damage a bubble can do even without leaking money out of a country.

In a bubble resources are diverted to bubble making activities. The resources will be permanently wasted. For example, businessmen in China are reluctant to focus on real economic activities and are devoting time and energy to market speculation. It means that China wouldn’t have many globally competitive companies in the future. Even though China has had three decades of high growth, few companies are globally competitive. The serial bubble making in the Chinese economy may be the reason.

A generation of young people is not interested in real jobs and is addicted to stock market speculation. They see their holdings changing in value in a day more than their monthly salary and have the illusion that they would make a lot of money in the market. Of course, most of them will lose everything and may take extreme actions afterwards. The social consequences could be quite serious.

A property bubble usually leads to overbuilding. The empty buildings represent permanent losses. Most people would laugh at such a possibility in China. After all, 1.3 billion would need unlimited properties. The reality is quite different. China’s urban living space is 28 square meters per person, quite high by international standard. China’s urbanization is about 50%. It could rise to 70-75%. Afterwards the rural population would decline on its own due to its high average age. So China’s urban population may rise by another 300 million people. If we assume they all can afford property (a laughable notion at today’s price), Chinese cities may need an additional 8.4 billion square meters. China’s work-in-progress is over 2 billion square meters. There is enough land out there for another 2. The construction industry has production capacity of about 1.5 billion square meters per annum. Absolute oversupply, i.e., there aren’t enough people for all the buildings, could happen quite soon. When it happens, the consequences are quite severe. Property prices could drop like Japan has experienced in the past two decades, which would destroy the banking system.

The most serious damage that a property bubble inflicts is in changing demographics. High property prices bring down birth rates. When property prices decline after a bubble bursts, the low birth rate culture cannot be changed. Hong Kong, Japan, Korea, and Taiwan all went through property bubbles during their development. Their birth rates dropped during the bubbles and didn’t recover afterwards despite government providing incentives. China’s one-child policy alone will lead to a demographic catastrophe in two decades. The property bubble makes the trend irreversible: when the government abandons the one-child policy, there wouldn’t be meaningful impact on birth rate. Within two decades Chinese population could be very old and declining. Of course, property prices would be very low and declining also.

In addition to net losses the redistribution aspect of a bubble has serious social consequences too. In the stock market bubble most households lose and a few win big. China’s wealth inequality is already very high. The bubbles make it worse. A sizable or even the majority of China’s population may not have meaningful wealth even after China’s urbanization is complete. It will lead to an unstable society. A market economy is stable and efficient when the majority has meaningful wealth and, hence, has a stake in the system.

In summary, the market frenzy now won’t last long. The correction may happen in the fourth quarter. There could be another wave of frenzy next year as China can still release more liquidity. When the dollar recovers, possibly in 2012, China’s property and stock market could experience collapses like during the Asian Financial Crisis.

Category: Investing, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

57 Responses to “Andy Xie: China Has Become A Giant Ponzi Scheme”

  1. emmanuel117 says:

    National Day is on October 1. Who called for a Red October?

  2. crazyjerrygarcialover says:

    Hanging man candlestick formation on the Shanghai.

  3. call me ahab says:

    excellent article- makes me quite nervous about a huge implosion emanating out of China-

    scary indeed

  4. Dogfish says:

    Surely this will all end well for everybody.

  5. Pat G. says:

    Oops, I guess this means they won’t be leading the world out of recession after all. And to think, we sent our best over there to teach them capitalism. What do you think could have gone awry?

  6. Andy T says:

    Looking at the Dow Jones Shanghai Index, which closed at 396, up over 100% from the 170 lows…it looks like it has another 10% to move higher before running into the big 61.8 at 430….so, it was a big rally and it’s a bubble, but whenever people talk about something being a bubble….chances are it has more to go….

    The whole situation in China seems a bit scary, but not something “short-able” yet, which is an interesting question…is it possible to short the Shanghai Index?

  7. DL says:

    This ponzi scheme has more to run…

    … when the suckers pile in en masse, then it’s time to set tight stops.

  8. Andy T says:

    DL…Indeed there tends to be a “blowoff” of some kind….there will be some “great data” that comes out that sends the last sucker into the fray to buy the “new high” because smart traders “buy high and sell higher”….If memory serves correct it’s actually quite difficult to short the market, which tells me all I need to know about what will happen when it’s ‘over’…some refer to as a waterfall effect.

    Just looking at it again…the big down move lasted around 168 trading days….this up move has lasted 149 trading days, so the next month should be interesting….maybe there is something to that self-fulfilling prophecy and the elections over there going down in early Oct?

  9. jse17 says:

    I follow a FUNDAMENTAL proprietary sentiment indicator that does NOT reflect that the Chinese market is overbought! The indicator tells me that the market is slightly below “fair market” value approaching equilibrium levels.

    To each their own and best of luck to all including even the skeptics (-:

  10. Onlooker from Troy says:

    Hmmm. Where have I heard of this kind of thing before?

    My limited understanding of the Shanghai is that only the natives can invest there. And they can’t short it either is what I’ve also read. But I don’t know the veracity of that info. It sure would boost a good ole bubble though, wouldn’t it?

    Insanity. Will it ever end?

  11. Onlooker from Troy says:

    It’ll sure get interesting in the global markets if this one blows. Since we’re all so joined at the hip now and it’s all one big trade. Good grief.

    Sure glad our genius economists, central bankers and finance ministers/treasury sec have it all under control. Yes they do.

  12. constantnormal says:

    Interesting to ponder the global money flows when the Chinese equities bubble pops … possibly money there will flee into gold, possibly in dollars (but not probably, due to it being currently easier (I would think) to buy gold that to buy foreign bonds for the Chinese investors. But I doubt that it will move into the local fiat currency.

    Also, how many foreigners will get sucked into a run-up in the Chinese equities markets? I can easily see the government there starting to provide a lot more access for foreigners into their markets, and encouraging more foreign purchases of Chinese stocks. I doubt that will happen, as it’s not like there is an abundance of risk capital sloshing about the globe.

    I think that Swiss banks will be doing some excellent business with well-to-do Chinese entrepreneurs. And I would not be surprised to see a lot of Chinese money buying choice real estate at fire sale prices around the globe. Kinda tough for the gummint to confiscate real estate — especially if the purchase is hidden via shell companies and the like.

  13. constantnormal says:

    Sadly, if the Chinese bubble will be popped by an increase in Fed rates, then we can look forward to a VERY large bubble occurring over the next several years, probably inducing equity bubbles all over the globe (as if the US equity markets are not currently bubbling), because the Fed is not going to be in a position to be able to raise rates for a very long time, probably not before the 2012 elections (for obvious political reasons, and don’t bother to raise the notion of the Fed being a “non-political” independent agency — it’s in D.C., therefore it’s political).

    I tend to believe that stock market bubbles are the instrument chosen by the central bankers to try and avoid a global depression. Too bad that they will only defer it, and make the eventual global depression larger and deeper.

    If things play out like this, there’s a fair chance that you can kiss civilization good-bye.

  14. constantnormal says:

    OTOH, if a strong dollar is likely to pop a Chinese stock bubble, the Chinese have the motive and means to prevent a strong dollar. This could get interesting.

  15. investorinpa says:

    Old news…this was blogged about here a few days ago:

    OTOH, one would say that if you do buy into the China bubble theory, buying into the FXP would look like a very good bet, don’t ya think?

  16. Mike in Nola says:

    Noticed this on Bloomberg tonight:

    “China Iron Ore Imports Handled by Ports Rises Most This Year
    Aug. 4 (Bloomberg) — Iron ore imports handled by Chinese ports rose 35 percent from a year earlier to 56.5 million tons in July, the biggest increase this year, the Ministry of Transport said today on its Web site. Container volume fell 3.8 percent to 10.1 million TEUs, it said. Cargo volume at Chinese ports rose 13 percent to 500 million tons, it said. ”

    The thing that caught my eye was that container volume fell 3.8% while iron ore imports are skyrocketing. The have nothing to do with all the raw materials being imported by the speculators. That may be the bubble to pop.

    The other thing that could happen is when there is some crisis in the coming months that causes the flight to safety we saw last year that drove the dollar up. That could also be the catalyst.

  17. Mike in Nola says:


    Got burned by buying FXP too early thinking that there’s no way they could be that crazy. You might want to wait a little longer.

  18. emmanuel117 says:

    “Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again.”

    In the end, there is still only one trade.

    @Andy T 10:58pm:

    In Jim Rogers’ book on China, he says that there’s a 10% limit on individual stock price movements. Also, the Chinese securities regulators rejected allowing shorting in February 2009 (I think).

    Took the 2007 bubble about a year to hit bottom.

  19. Christopher says:

    “The bursting will happen when the US dollar becomes strong again. ”


    That could be awhile. I think the EU banks will blow up before China. Or us.
    Anyway you cut it….it ain’t gonna end well.

  20. ab initio says:

    In the US the policy that has been established since the 80s is serial bubble blowing through easy money. There is a snowball’s chance that the Fed will raise rates before the next Presidential election. Team Obama is following the Paulson script on steroids. They will borrow and spend even more and then some more until the unemployment numbers start to tick up. If the markets choke and start to bid up rates Bennie or Summers (if he is appointed) will monetize to assure ZIRP. There is no choice as a runup in rates will be like a torpedo to the hull of the USS Federal Budget. The only way this spending and printing like a drunken sailor gets curtailed is if our creditors primarily the Chinese and Japanese force it. This is where Andy Xie’s report on the China bubble becomes very interesting. Note Andy is a highly credible analyst – he is among the few that got the US credit bubble right and called it for what it was.

    Andy’s implication is for the dollar to strengthen leading to the bursting of the Chinese bubble. But what if the Chinese bubble just becomes unsustainable and starts to go down? How does that collide with our continued debt gone parabolic? Would the Chinese need to repatriate their $1.5 trillion US treasury reserves rather quickly? And how does that collide with the yet to be over banking problems in Europe that are much larger than the GDPs of several countries in the Euro zone?

  21. eric temple bell says:

    It’s funny… Fusion-IQ just gave BUY signal to FXI. Chasing performance, are we?


    BR: No, using trend as one of 10 ETF analysis components.

    Remember, ETFs provide no data for earnings or institutional ownership — two of the fundamental factors analyzed in the FusionIQ algorthm.

    So with ETFs, the technicals — including momentum and trend — are dominant factors.

  22. [...] home would raise the prospect of stronger growth and tighter monetary policy. Andy Xie (hat tip to Big Picture) believes he has found one such place in China: Chinese stock and property markets have bubbled up [...]

  23. Seattle Chill says:

    I find it curious that Xie singles out inflation and rising interest rates as the likely cause of a surge in the dollar, as I had practically the opposite scenario in mind: another round of panicked deleveraging, debt deflation, a flight to quality, and plummeting yields.

    Has the disconnection between the economy and the financial markets ever been so complete? Cities and counties are going broke, office towers are sitting dark, the FDIC is nearly insolvent, one out of every five homeowners is underwater on his mortgage and/or out of a job, and yet I’m supposed to be impressed that Intel had a profitable quarter. Words fail.

  24. jc says:

    It seems like the various stimuli around the world are stimulating the stock & commodity markets and not the economies – maybe an attempt to create a feel good atmosphere where US consumers will pick up the spending baton again, but they aren’t working and they can’t use the home ATM. Somehow BB has to find a conduit to the US consumer for the piles of cash he’s printing, the banks are shortstopping it!

  25. Simon says:

    @Seattle Chill

    Good point Andy is not talking about deflation now at all but he more than hints that a heavy dose of it could be in the future. He draws a strong parallel to Japan so in that sense he is predicting future deflation.

    A point I find very interesting is the effect property bubbles have on fertility. Many would debate it but I think it holds some water. The environmentalists would probably like the prediction of a catastrophic demographic imbalance in China.

  26. leftback says:

    FXP isn’t shorting Shanghai, it is a double short of FXI which tracks Chinese companies that trade in Hong Kong, I believe. The FXI trades a lot like the NASDAQ from my observation, but like a leveraged version. So this is another case of their being ONE TRADE. AT is correct about the $ being the critical variable here. Once we see a move away from risk assets and into the USD and JPY, then Shanghai is toast like all the other markets. The money going into that market now is mainly domestic investors and they always get burned.

  27. Mike in Nola says:

    I think Seattle Chill has it right, which is sorta what I said. Don’t see why there won’t be a repeat of some sort of what happened last year. Nothings been fixed and the Congress ain’t gonna bail any banks out.

  28. jc says:

    Hyperinflation can be used to solve several problems, obviously pay off foreign debt with peso-like dollars and they can restructure social security COLA calculation to screw the old timers and with progressive personal tax rates they can raise revs without any “new” taxes.

  29. VennData says:

    What asset price isn’t supported by the “hope for price appreciation?”

  30. Mike in Nola says:

    Goldman same store sales down again. Somehow CNBC missed it :)

  31. danm says:

    The media never calls a bubble so is this really a bubble?

  32. dead hobo says:

    Andy T Says:
    August 3rd, 2009 at 10:47 pm

    The whole situation in China seems a bit scary, but not something “short-able” yet, which is an interesting question…is it possible to short the Shanghai Index?

    I know almost nothing about the Chinese stock market except for a few things I think I remember hearing before the last collapse. It is the home of low quality penny stocks and only Chinese can put their money into it. It’s pretty isolated. Assuming away the rest of the Chinese economy for a moment, if it disappeared from the face of the Earth or went negative, most people wouldn’t notice after a couple of days.

    That being said, it looks like the Chinese feel like they missed out and/or had so much fun watching other economies implode from a failing credit bubble they want one all of their own. Very industrious.

    Here’s China to my understanding … Hoarding commodities and forcing up the price as a result. Overbuilding and overloaning into a massively inflated real estate boom. On the other hand, they get to use cash they made on sales to the US instead of printing it up. As opposed to the printing press and direct stock market injections used by the Fed (off topic: S&P 1200 on the way by end of year?)

    There, from a certain perspective, they are being true to their Communist heritage. They are redistributing wealth owned by the state to the people via a credit bubble that will inevitably explode soon. Unfortunately, when the shit hits the fan, they will need to raise cash. To do this they have stockpiled commodities and stockpiled US debt they can sell. Now, what does econ 101 say about a flood of supply hitting a market in equilibrium or one that is already saturated with oversupply?

    Then what? Interest rates on UST debt are going to go up a tad, maybe several tads. Other commodities will fall unless index funds are available for that commodity to cushion the dip. The Fed will have to stop direct injections into the stock market to deliberately crash it so that UST debt appears to be a flight to safety, keeping rates low. Will that create a double dip over here?? Beats me.

    BTW, I worry about you when you and others here plan to short the market. First, it’s fixed and you can’t ever beat someone who is playing their own game. Ever. Maybe once the FRBNY direct injections stop, but not before. Second, you and others remind me of the archetype of the guy at the horse track who has a system that only works occasionally, but next time for sure it will win big.

  33. Dogfish says:

    I can already hear it now.. “In these difficult times, we have to join with our neighbors to the north and south…”, and then we get the NAU and Amero.

  34. Dogfish says:

    I can already hear it now.. “In these difficult times, we have to join with our neighbors to the north and south…”, and then we get the NAU and Amero as the “fix” to our economic problems that were caused by those who stand to gain the most from the recommended remedies.

  35. dead hobo says:

    call me ahab Says:
    August 4th, 2009 at 8:40 am

    I wonder if GS employees get hassled when it’s found out where they work

    I’m starting to think that GS is being used as a convenient distraction. And they’re being paid well for their task. The FRBNY injects cash into the market via open market operations. GS and other iBanks use HFT to perform the pump. They get to keep whatever they make as payment for doing the pump. They also have to take the heat while Uncle Stupid pretends(?) to look addled. A pumped market creates pacified people who might feel free to spend after the 401k is repaired. Except a lot of people are too stupid to remember recent history and many will buy at the top of the inevitable implosion, again. Plus, Uncle Stupid is also pumping up oil prices and creating another spike.

  36. [...] Former Morgan Stanley analyst Andy Xie made some rather strong comments about the Chinese market (via Barry Ritholtz) [...]

  37. call me ahab says:


    no doubt- asset prices being supported- including RE- with tax incentives and foreclosure moratoriums with the hope that price declines can be slowed-

    the USG is all in with all available assets- even if it ruins the country in the long term

  38. dead hobo says:

    call me ahab Says:
    August 4th, 2009 at 9:39 am

    the USG is all in with all available assets- even if it ruins the country in the long term

    Yup. Plus Tim and Barak want to canonize the Fed as the country’s official black box slush fund. Audits expressly not permitted. Ever. The Senate can be counted on to circle the wagons, too. What do you do if you’re into massive social equity and have a black box printing press that only prints money?

  39. dead hobo says:

    The Republicans want the courts and, especially, The Supreme Court. The Democrats want the Fed. What a choice. Socialism Unlimited via ownership of the Fed printing press or social conservative fascism.

  40. Greg0658 says:

    PatG “teach them capitalism. What do you think could have gone awry?”
    imo capitalism is a ponzi scheme driven by population growth and/or the repossession of wealth via war and/or laws

    I understand Chinas Red Dogs needing to get off the porch and run the streets
    (but I’m wondering who is playing who)
    (this double agent says reverse engineer everything – particularly nanos)

    these C S F M U’ism’s and now unfettering activism .. its gonna get interesting
    get um Dillan

    interesting CNBC from the Hill this morning
    (except for the commercial breaks)
    (good for surfin to see “whats happenin”)
    (old ways die hard)
    Better Homes Gardens and Garages used to work .. before ……. ummm

    now to dream up a new scheme to get my daily bread since … systems are being .. overgrown

  41. [...] China has become a giant ponzi scheme – Chinese stocks are 50-100% overvalued (Andy Xie, via Ritholtz) [...]

  42. I-Man says:

    The full piece is long, but I encourage everyone to read it in its entirety. I like Andy Xie. I can see why he didnt fit in over at MS…

  43. thetanman says:

    Everyone seems to be able to spot a bubble, but then they forget about the most important part-time. These things take longer than you thought possible and go higher than you ever dreamed. And as far stocks are concerned, we continued to fall for a year after the recession ended in 2001, and continued to rise for over 2 years after housing started to deflate in 2005. So good luck playing the reversal.

  44. call me ahab says:


    you speak the truth my friend- it’s the timing that kills you

  45. Greg0658 says:

    its Dylan (caught a small typed email address)

    Dogfish “with our neighbors to the north and south…and then we get the NAU and Amero”
    haven’t heard that one in a while .. the EU started having issues around the same time that discussion curtailed … from US Jaycee experience, when we consolidated chapters to create a more going concern, interest waned .. imo because the “whats in it for my home community .. directly” was diminished
    (ps imo – your done at age 40 killed that organization) (the whole junior chamber thing)

  46. FrancoisT says:

    @Seattle Chill
    “Has the disconnection between the economy and the financial markets ever been so complete? Cities and counties are going broke, office towers are sitting dark, the FDIC is nearly insolvent, one out of every five homeowners is underwater on his mortgage and/or out of a job, and yet I’m supposed to be impressed that Intel had a profitable quarter. Words fail.”

    Words were failing me too…until I read this:

    “U.S. companies are getting a huge boost from their international operations. Most North Americans don’t pay enough attention to this data, but a quick synopsis from ISI Group analysts from the past week can shed some light.

    The improvements, in many cases due to government stimulus, make your eyes bug out: Global vehicle sales are up 21% in the past seven months; steel production is up 15%; China’s electricity production is up 14%; Korean GDP is up 9.7%; Japanese exports are up 20%; and Taiwan export orders are up 45% and industrial production is up 50% in the past five months. It’s not just Asia, either: French consumer spending is up 3.4% in the past four months; Canadian retail sales are up 2.5% in the past five months; the Brazilian unemployment rate has fallen to 7.9% from 8.6%; and the Mexican unemployment rate has fallen to 5.7% from 6.2%.”

    and this:
    “networking equipment titan Cisco Systems whose chief executive last week said he predicts 12% to 17% growth and sees productivity for the nation overall rising up to 3% annually, which would potentially equate to gross domestic product growth rising to around the normal rate of 4% by 2011.”

    One wonders if, this time, the rest of the world could pull the US out of the recession. Could it be what the financial markets anticipate?

    Time will tell.

  47. danm says:

    BTW, I worry about you when you and others here plan to short the market.
    At one point, GS will only be able to make money by shorting the market, that’s what they did with real estate.

    The issue is when.

  48. cvienne says:


    “At one point, GS will only be able to make money by shorting the market, that’s what they did with real estate.”

    Yeah, can’t you see it?

    The Treasury needs to fund 2 trillion by 9/30…

    So GS buys cheap puts here on the SPX…Tanks the market, buys to cover the cheap dollar, and the long bond, and shorts commodities…

    A rush back to the “safety trade”…

    When it holds enough Treasuries, to can continue to call even more shots (threatening to SELL if anyone gives them crap about bonuses)…

  49. Thor says:

    DH – “The Republicans want the courts and, especially, The Supreme Court. The Democrats want the Fed. What a choice. Socialism Unlimited via ownership of the Fed printing press or social conservative fascism.”

    Very very perceptive! Hadn’t thought about politics in this country in quite those terms but I think you hit the nail on the head.

  50. MRegan says:

    Hey Ahab-

    Re the “No Big Purchases” article- does anyone remember “GoodFellas”? What the flipping tuna!?! Maybe if those GS coprophagists would start feeling conflicted and seek out therapy, we would all finally recognize them as the g–d— mob thieves they really are.

    I recommend a look at VALE. Also, is the Loonie a possible shelter for USD decline?

    Lastly, what is GS buying? We know what the sell. What thing(s) are they accumulating?

  51. [...] • Beijing worries about another market crash (AP) See also, Andy Xie says China Market is a Ponzi Scheme [...]

  52. The Curmudgeon says:

    The only part of Xie’s analysis that seems a bit speculative is the part about birth rates. No one really knows for sure what drives lowered birth rates, except that they are closely correlated with reduced death rates (increased life expectancies) which are in turn closely correlated with the level of economic development.

    Whatever it is that drives them, birth rates across the entire world are declining (in less developed areas by more than half in many cases), and in many places (China, South Korea, Japan, Western Europe, the US, Canada, Russia, Israel)– in fact in all developed countries they are at or below replacement (about 2.1 births per female). This can’t be attributable solely to the formation of property bubbles.

    The rest of it I get. It’s quite easy to see how a cheap dollar blows a Chinese property bubble. All this tinkering with the money. This, like the long run, will end badly. At least the Chinese will have plenty of iron ore and copper with which to build more vacant buildings when the crash comes.

  53. carlwied says:

    Wait a minute… Is somebody suggesting that a 100% stock market move in 7 months is somehow not right?

  54. [...] recession, could drag it back down with a financial crisis of its own, scarily envisioned by former Morgan Stanley analyst Andy Xie in this post China Has Become a Giant Ponzi Scheme at the blog The Big Picture. (Or in my own more [...]

  55. [...] China now experiencing ‘The Biggest Bubble of Them All‘, Andy Xie recently warned that “Property prices could drop like Japan has experienced in the past two decades, which [...]