The Housing Bubble

August 3, 2016


By: Michael Ambrozewicz & Fiorenzo Arcadi


           Whatever unraveling world the financial markets thrive by may have to do with the destabilizing aspects of a rising market. It’s not so much that excessive debt undermines investment; it’s the world of exuberance that amplifies emerging nations to follow precisely the same logic of paper profit that resembles Wall Street.


           Wall Street may pontificate orderly markets with the agreement of having financial institutions believing in sustaining a rising market. The paradigm may pose a problem with emerging markets such as India and China that rely heavily on the individual investor to prop up their stock markets. These individuals may have the psychosis of the survival of the fittest and the belief system that government intervention is the norm that subscribes to a feeling that the government will intervene to elevate markets.


           For China especially, this has been the case. China’s outflow of capital was followed by pessimism; however it was also followed by China’s central command in supporting and investing in lifting the markets. These common Chinese investors created an isometric response by virtue of understanding the notion that a arbitrarily higher market will follow a sense of capitalizing and profiting from government intervention.


           If economic forces have led to the decline in traditional banking in terms of making loans and financing them by issuing short-term debt deposits, then the same risk is correlated by these Chinese investors that are required to take on more risk with the promise of higher return.


            If the early corrective action of the global economy is based on more capital requirements, then it really doesn’t explain the global community of banks acting as derivative dealers exposing banks to more hazards than traditional banking. The banking and accounting principles do not take public disclosure into account in terms of market trading activities. In fact, Wall Street’s mantra is to establish paper profit as a form of financial stability that increases rising expectations.


           Perhaps the most pertinent cycle is the real estate bubble. It seems to creep up out of nowhere by its own volition. It’s often the banks perception of risk in the real estate market that perpetuates the herd mentality of higher leverage and inadequate analysis that destabilize the asset price cycle. There’s no doubt the rapid expansion of bank credit into the real estate sector increases the value of real estate prices, thus increasing the expectation of the consumer that presumably has credit to spare.


           The banks perceive value or collateral only through the myopic world that creates the exponential value of a seemingly undermined world of growth that builds a pyramid of irrational risk. These risks play a factor in the stock market no different than the world they create in sustaining the bubbles of a rising market perpetually. It goes by an old saying that if you print money, the asset prices of everything in our world will rise forever. The only profit relies on the sucker who overpays and has the bank giving them credit because of their perception that they’re credit-worthy.


            The banks can only sustain this pyramid based on what is credit-worthy in our world. The pyramid isn’t based on collateral, it’s based on perceived yield that the banks must profit for the shareholders and sustain that pyramid due to its otherwise crumbling effect.


            One only has to look as far as Japan’s dysfunctional economy and their government’s fiscal investments which rely on the Japanese banking system misallocating funds by keeping insolvent firms in business. Inefficient investment firms in Japan crowd out potentially profitable firms only to lift inadequate and unproductive firms.


           China’s battle with Japan in the South China Sea projects is based on China’s economic expectations. Even though China was unsuccessful in exporting its rail system to the US, China refuses to roll over to Japan and have begun to win over other Asian countries with their own infrastructure, rail systems and high speed trains. China isn’t providing any financial burden to Indonesia or any other developing country to build their infrastructure. On top of that, China will develop areas along the railway routes that were previously refused by Japan.


           Many of these stimulus programs are playing into the hands of China. They’re very strategic and they understand America’s willingness for Japan to compete with China. China has more monetary leverage than Japan and is the reason for Ben Bernanke’s visit to Japan. The revolving door of money expansion fails to help Japan compete with China’s established networks and investment in the business world.


           I would agree with Goldman Sachs’ assessment that the rising stock market may be slowing down. They state that the prolonged era of low interest rates following the financial crisis have encouraged Corporate America to borrow funds through the bond market in order to use stock buybacks to pay their shareholders. Chief U.S. Equity Strategist David Kostin further indicates, “Investors have rewarded buybacks for many years but the pattern has reversed in 2016.” This means that it’s highly likely that the days of equity investors rewarding companies who use stock buybacks have finally begun to move behind us.


          A good example is a neighbor of mine who told me that he sold all of his real estate and commercial properties. He’s sitting tight with over $20 million in cash and told me that the chances of him getting this amount of money again were slim to none. He’s waiting for the cycle to revert back to use his money to beat out the banks and buy property at reversed prices. He developed a sense of animal instinct by building upon the ultimate trait of patience by stalking his prey. The only problem he faces is that there’s no transparency with banks anymore involving their investment techniques and investment risks. He made the right decision.

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