Mother of All Bubbles -- China

[Arden]

Why go so far? Just short a steel exporter to china- like RIO or VALE.

[Hester]

Why go so far? Just short a steel exporter to china- like RIO or VALE.

And BHP. Doesn't have to be steel, any company that exports building materials. I'm short them all.

[Arden]

Steel is better- the railroads they've been building  like crazy are made of steel, not cement.

More importanltly, Steel is recyclable, so just a small drop in construction and they need no more imported steel.

[watsa_is_a_randian_hero]

I really don't know what to think about China anymore. So much is rotten with their system, but at the same time, they are starting from such a low base and still have so many low-hanging fruits to harvest... I don't pretend to know how it will play out and on what timeframe.

+1.  this is what makes me afraid to short.  On the one hand, I'm cautious with anything exposed to china (commodities, japan, australia).  On the other hand I don't know if I'd actually short because of what you've said here.

I'm by no means an expert, but from what I've read I believe only a small fraction of their population is educated and/or urbanized.  In addition, China nationally has massive reserves - it would seem to me they could just use this to fund any necessary stimulus if they hit a speedbump.

On the flip side, as a believer in free-markets, I would have to bet that 1 of 2 things happens in the long run.  Either they will have a massive correction because of government mis-allocation of resources (ie, building empty towns, as rumors mention), or they will continue to become more and more capitalistic/democratic.

[SmallCap]

I am very cautious  regarding all things relating to China because of some of the things posted here. Not that i think I have any real amazing insight into it but everything I see gives me an uneasy feeling around it.

But it is interesting ready 3rd Avenues (Marty Whitman) quarterly reports and see them concentrate more and more on the Hong Kong and china real estate related positions.

Has anyone else been reading the same thing and wondering about it?

I wonder if I am missing something about his positions that makes them safer then they appear.

[vinod1]

I am very cautious  regarding all things relating to China because of some of the things posted here. Not that i think I have any real amazing insight into it but everything I see gives me an uneasy feeling around it.

But it is interesting ready 3rd Avenues (Marty Whitman) quarterly reports and see them concentrate more and more on the Hong Kong and china real estate related positions.

Has anyone else been reading the same thing and wondering about it?

I wonder if I am missing something about his positions that makes them safer then they appear.

I keep wondering about the same about Whitman. I think his asset value centric approach leads him to place a little bit too much emphasis on "readily ascertainable net asset values" which might overlook overvaluation when the underlying assets are overvalued. I think Whitman is very smart but I cannot help but think this is his weak spot.

Vinod

[meiroy]

"If I'm a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I'm willing to pay 50 basis points for five-year protection on this same company."

If the business defaults within five years, what would he get by owning the CDS? what is his upside? For cost, my understanding is that he is paying 0.5% per year on the paper's amount.  Does he actually have to pay it yearly? Can the interest rate change? Thanks.

In this case the upside is 200 times the yearly interest he must pay, which is .5%. So after 5 years he would pay a cumulative 2.5% of the notional value of the CDS and then would recieve the entire principle if it defaulted after year five.

One might devote 1% of your portfolio each year to this trade, and therefore every year there is no default it's a 1% drag on performance, but if a total default happens, your entire portfolio would make 200%.

The interest rate is locked by contract, so that cannot change, but at any time he can sell it back to some other buyer in the market for more (less) if the rates of the CDS have risen (fallen), so the opportunity cost of holding the contract rises and falls with the market.

Regarding what you write about the RE bubble, IMHO you are spot on 100% and the RE bubble is just the tip of the ice-burg.

As for the CDS, what you're saying is that they just have to pay the insurance premium of 0.5% a year to get a full 100% of the insured principle? That is completely insane.

[Hester]

"If I'm a Japanese bank and I lend money to a new business, I get 1% on 10-year paper. Then the bank gets a call from me, and I'm willing to pay 50 basis points for five-year protection on this same company."

If the business defaults within five years, what would he get by owning the CDS? what is his upside? For cost, my understanding is that he is paying 0.5% per year on the paper's amount.  Does he actually have to pay it yearly? Can the interest rate change? Thanks.

In this case the upside is 200 times the yearly interest he must pay, which is .5%. So after 5 years he would pay a cumulative 2.5% of the notional value of the CDS and then would recieve the entire principle if it defaulted after year five.

One might devote 1% of your portfolio each year to this trade, and therefore every year there is no default it's a 1% drag on performance, but if a total default happens, your entire portfolio would make 200%.

The interest rate is locked by contract, so that cannot change, but at any time he can sell it back to some other buyer in the market for more (less) if the rates of the CDS have risen (fallen), so the opportunity cost of holding the contract rises and falls with the market.

Regarding what you write about the RE bubble, IMHO you are spot on 100% and the RE bubble is just the tip of the ice-burg.

As for the CDS, what you're saying is that they just have to pay the insurance premium of 0.5% a year to get a full 100% of the insured principle? That is completely insane.

Right, but remember for it to pay in full there needs to be a full default, the underlying debt worthless.

It is insane that anyone would take that risk for such a small interest rate, but there are far crazier prices that have happened. In 2007 CDS's on Dubai sovereign debt were trading at .04%.

That's right, the market was pricing a default once every 2,500 years. This for DUBAI, when oil happened to be peaking.

I think Klarman and a few others made some money off that.

[Liberty]

http://www.bloomberg.com/news/2012-02-22/china-pmi-may-shrink-for-4th-month-survey.html