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Greece ‘A Sideshow To China Meltdown,' Ex-BMO Chief Economist Says

jmotivator said:
Your point was stupid. Most of the wealth in the country is in investments that can and do have a way of vanishing.

I could buy $1 million in gold today and my wealth derived from that gold would be $1 million. If the price of gold drops by 20% then I lose $200,000 of wealth without losing the underlying commodity.

The losses in the Chinese stock market came from a loss in the valuation of the underlying resources.
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Your view on unrealized capital/asset appreciation (paper wealth) doesn't reflect that you purchased the gold from someone, who in turn purchased it from someone.
If the originator purchased it for 800,000, sold it to you for 1,000,000, and you sell it again for 800,000 .........
no net wealth is lost. your individual net paper wealth might decline, yes.
saying that this 2.5T is "lost" is a gross oversimplification of the real net wealth changes/transfers that occurred during the ramp up and the current decline of their market bubble.

In a way, you've unconsciously admitted that market-cap is a useless #.
I'm surprised you would.
 
Peter Grimm said:
I personally just see it as the growing pains of a young Chinese stock market. They've still outperformed the S&P over the past few years in terms of growth. If not for the fear I have that Western Banks are exposed to this downturn (I haven't looked in to it but I'm sure we are), I would just chalk the whole thing up to that's what happens when you let people borrow on 100:1 margin.... you have booms and busts.

China is still growing and fundamentally strong, in my opinion. They've just inflated their asset values and now they are watching that bubble pop, but they're still growing.
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Well, for everyone's sake, I hope you are right. Trouble is, it would appear that the stock markets don't appear to have rectified the regulation of high risk practices that brought about the 2008 crash. Why should we be confident that history won't repeat itself?
 
SlevinKelevra said:
Your view on unrealized capital/asset appreciation (paper wealth) doesn't reflect that you purchased the gold from someone, who in turn purchased it from someone.
If the originator purchased it for 800,000, sold it to you for 1,000,000, and you sell it again for 800,000 .........
no net wealth is lost. your individual net paper wealth might decline, yes.
saying that this 2.5T is "lost" is a gross oversimplification of the real net wealth changes/transfers that occurred during the ramp up and the current decline of their market bubble.

In a way, you've unconsciously admitted that market-cap is a useless #.
I'm surprised you would.
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So in trying to save your argument you have chosen to ignore the value of goods in wealth determination?

That is like saying the garden is devoid of yellow flowers... if you don't count the sun flowers.
 
jmotivator said:
Let's discuss how much China is up after the crash is over. Until then let's address what the current crash does to the Chinese economy and how devastating it is to the pillars of Chinese economic growth: Real Estate and outside investment. China has no experience in dealing with Market crashes, and it shows in the way they approach the current crisis. They are more focused on propping up cosmetic economic indexes over addressing underlying structural problems. I mean, in an only half kidding way, I think at this point the best tool for market correction in China is dynamite. If they blew up all the empty commercial and residential units in the country they may be able to stop the bleeding by saving the Real Estate market.



Yes, but you could say the same thing about any market collapse, that doesn't make it any less devastating. I have long used the analogy of a "wing stall" for how a government should handle a market crash. In the early 1900s flying was a new skill, and pilots were learning the hard way of the danger of wing stalls (when the air running over the inside wing drops too low to produce lift in a low speed turn, causing that wing to fall and the outside wing with lift to vault the plane into a spin). In the early days a wing stall was death. Pilots struggled for years to develop a protocol that pilots could use to correct wing stalls, but nobody could think fast enough to adjust to all the chaotic gimbals that a wing stall introduced.

It wasn't until WWII that the wing stall was finally solved. The solution came from the wide distribution of parachutes. Since a pilot was now able to eject from a wing stalled plane, more pilots survived to tell the tale... and the tale was very revealing. What many pilots were reporting was that after ejecting from wing stalled planes they were left to watch their spinning planes right themselves and fly on into the wild blue yonder absent a pilot. What they learned was that the general forward thrush of the propeller and the drag of the wing and the tale slowly muted the chaotic gimbals until the plane was flying in a mostly stable direction and lift was returned to the stalled wing. Problem solved.

The solution for pilots experiencing wing stall: take your hand off the stick. Fighting only makes it worse.

That is my personal philosophy for how Government should deal with market crashes.



We'll find out. I know that Chinese investment was all the rage over the last few years so I would guess the contagion is substantial.
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I would say that the pillar of Chinese economic growth is its export economy, although the country is (rightly) trying to shift to a consumer economy. China's stock market is crashing because consumer demand in the West has slowed, and since they allow investors to be so highly leveraged, the downturn has been magnified.

The useless real estate projects have nothing to do with China's current problems, although the amount of bad debt on Chinese government books could be a cause for concern at some point in the future.
 
jmotivator said:
So in trying to save your argument you have chosen to ignore the value of goods in wealth determination?

That is like saying the garden is devoid of yellow flowers... if you don't count the sun flowers.
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That's "liberal" ideology, pick and choose the data
 
jmotivator said:
So in trying to save your argument you have chosen to ignore the value of goods in wealth determination?

That is like saying the garden is devoid of yellow flowers... if you don't count the sun flowers.
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No, I'm simply explaining to you that until you realize a gain on an asset, you haven't done anything with its wealth, nor it with yours.


You have a bank account with $101 dollars in it.
Feeling lucky, you withdraw $1

You invest that $1 in a stock. It goes up to $200. You are greedy and don't sell. It falls to $100. You relent and sell.

You place your proceeds in your bank account.

What is the value of your bank account now, ceteris paribus (and ignoring commissions/fees for the trade)

Has your net wealth increased?

Would you be in favor of having yearly capital gains taxed on UNREALIZED asset appreciation?
 
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Andalublue said:
Well, for everyone's sake, I hope you are right. Trouble is, it would appear that the stock markets don't appear to have rectified the regulation of high risk practices that brought about the 2008 crash. Why should we be confident that history won't repeat itself?
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We shouldn't. You're absolutely right that China is repeating a lot of the mistakes the US made leading up to the 2008 crash. There are some diffrences as well, though.

In the 2008 crash: The American government gave incentives to mortgage lenders to make home loans to people with bad credit. Good intentions, bad idea. The mortgage lenders "packaged" those loans and sold them on the open market, as is commonplace with most loans. The packaged loans were insured by companies like AIG, given the stamp of approval by ratings agencies like Moody's, and they were bought by investors all over the world.

When the junk loans ended up being worthless becuase they were made to people who had no money, and who had no business being in houses they couldn't afford, all those people who made that bad investment lost money.

Yes, leverage also played a part. If you think about it in plain terms... minus all the fancy economic language... it's really amazing how the managers of pension funds around the world would borrow money (in some cases, more money than they had), in order to use that money to buy shares in the poorest people's mortgages.... people who normal mortgage lenders would NEVER have lended money to... if not for the government stepping in and giving them incentives to do so. Nobody ever stopped and said "hey wait, what if these loans never get paid back?"

Incredible.


In China, they also have a bubble brought about by overconfidence, but the underlying fundamentals are different. We could talk all day about that. They have problems as well, but certainly their own, unique brand of problems.

I still think China will be fine.
 
jmotivator said:
Butthurt alert!

It's no secret that the Chinese economy has been driven for years by foreign investment. They have dumped all this money into building ghost cities the size of large US cities that are less than 25% occupied.

The song has stopped and everyone has turned in a frenzy to grab a chair only to find that most of the chairs were imaginary.
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Nah. The Chinese economy is driven by the fact that they manufacture knick-knacks for most of the developed world. As long as people are buying $2 hammers and $10 golf gloves, they will be fine, fundamentally.

I don't think this crash has anything to do with empty real estate.
 
prefacing this with my expertise on the chinese market is near nonexistent

my take is that their market seems like the nasdaq before the nasdaq crash

too many companies flying way above their true market value

when the average stock is selling at 85x earnings compared to our 20x earnings, it might give you pause

some companies will come out of it bruised and battered....others may be down for a great while

market exuberance is a killer at times.....and this one got way ahead of itself
 
SlevinKelevra said:
No, I'm simply explaining to you that until you realize a gain on an asset, you haven't done anything with its wealth, nor it with yours.
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Of course it is yours, and your wealth at any given moment is determined by what those assets are worth at the time, not by what they might be worth tomorrow. The vaulation of the asset at any given time is what that can be exchanged for in currency. That you don't choose to excvhange it for currency on a given day doesn't mean it isn't mine.


You have a bank account with $101 dollars in it.
Feeling lucky, you withdraw $1

You invest that $1 in a stock. It goes up to $200. You are greedy and don't sell. It falls to $100. You relent and sell.

You place your proceeds in your bank account.

What is the value of your bank account now, ceteris paribus (and ignoring commissions/fees for the trade)

Has your net wealth increased?
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My bank account has $200.00. What was my net worth when the stock was at $200?

Would you be in favor of having yearly capital gains taxed on UNREALIZED asset appreciation?
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What you assets you are taxed on is a matter of policy, not wealth. If I took my $200 out of the bank and stuffed it in my mattress what is it worth? Would I be taxed on the money in my mattress?
 
jmotivator said:
That you don't choose to excvhange it for currency on a given day doesn't mean it isn't mine.
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No, it just means it isn't real wealth (yet)



My bank account has $200.00. What was my net worth when the stock was at $200?
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$100


What you assets you are taxed on is a matter of policy, not wealth. If I took my $200 out of the bank and stuffed it in my mattress what is it worth? Would I be taxed on the money in my mattress?
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Are you currently taxed on the money in your bank account?
 
SlevinKelevra said:
No, it just means it isn't real wealth (yet)
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Sure it is. Are you saying that a person's net worth does not count the value of their investments? If you count only the cash on hand then most millionaires... wouldn't be millionaires.

$100
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Wrong.

Are you currently taxed on the money in your bank account?
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I'm taxed on the interest. If my account isn't taxed does it not count as wealth?
 
SlevinKelevra said:
No, I'm simply explaining to you that until you realize a gain on an asset, you haven't done anything with its wealth, nor it with yours.


You have a bank account with $101 dollars in it.
Feeling lucky, you withdraw $1

You invest that $1 in a stock. It goes up to $200. You are greedy and don't sell. It falls to $100. You relent and sell.

You place your proceeds in your bank account.

What is the value of your bank account now, ceteris paribus (and ignoring commissions/fees for the trade)

Has your net wealth increased?

Would you be in favor of having yearly capital gains taxed on UNREALIZED asset appreciation?
Click to expand...

Actually, it's not as simple as you make it out to be. Cash itself is nothing but an unrealized federal reserve note. Cash is an asset just as a stock is an asset. Whether you hold dollars, gold, stocks, real estate, foreign currency, or whatever.... the only difference is the relative value of that asset to other asset classes, and the liquidity of that asset to be exchanged for other things.

So in a sense you're right... assuming no appreciation $100 cash is better than $100 stocks because you can go to a grocery store and buy stuff with cash, but the stock is not purely "unrealized" as one can use his stocks as a form of currency if one wishes.

Gold is even more murky, because one conceivably could buy milk and cigarettes with gold rather than dollars.
 
jmotivator said:
Real estate prices are in collapse and have years of over stock, the markets have lost 30% of their value and show no sign of slowing. I'm not sure what you see as positive in the Chinese economy at this point.
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Seeing 'positive' no, but that doesn't mean the whole thing is going to collapse either.

There's a HUGE middle between not positive and collapsing.
 
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