Canada: A Storm Brewing In China? I used to be talking to someone about goods last night therefore I can’t help but sound the alarm again. As I read the Fairfax Annual Letter to Shareholders this morning, I used to be reminded of the following quotes from Prem Watsa, CEO of Fairfax (FFH). Where do the truth is speculation in the marketplaces today?
Clearly in the commodity markets. The price tag on silver and oil and whatever product you want to look at-corn, wheat, agricultural goods, mining commodities-have all risen in parabolic curves. 1,500 an ounce. You cannot hedge today. No gold company will hedge that gold production. They could guarantee plenty of profits, however they won’t do that because they think it will be going higher. 1,300, so people will not hedge. They will not hedge oil. I could think of only 1 company that hedges its oil.
4 per pound, even though simple truth is has hardly ever been at this price. The cost of production is very low, so you can make a lot of money if you hedge your copper price. But almost no one will hedge today, and that can be an indication of speculation. We met people in China, even ordinary people, who owned three and four flats.
I would tell them, “If you sell one apartment, you’ll have a million dollars, free and clear. And you’ll have three more apartments still. ” Many of these prices have risen in four years fourfold. You know what the person says? She says, “I can’t do that because I sold one two years ago and it doubled from then on. Today So you see the ditto in goods? There’s a ton of speculation in commodities.
There is over-inventorying. Whenever the purchase price up will go, people buy more than they want because they think it shall continue to go up. So are their inventories. I can’t confirm that for you, but the experience will claim that there are inventories all around the place-of zinc and copper and nickel and silver. Many people are buying gold, and in fact, ETFs have been made up of something similar to 30-40 percent of gold in the form of paper. So, what is the tipping point? This is actually the beauty.
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You never can inform when the music will minimize. I can’t tell, but you know it will end. In this full case, it might end because the economy weakens and China goes into a small amount of a hiccup. The commodity price speculation will end as certainly as you and I are having this interview today. It shall end, and for individuals who’ve speculated, it will end badly. Meanwhile we have concerns over potential bubbles in emerging markets.
Consider, for example, what we learned on a recently available visit to China: many house (apartment) prices in Beijing and Shanghai had gone up almost four times – before four to five years! “Buy two and sell one after it doubles to get one for free” goes the refrain!
In his article in Vanity Fair, “When Irish Eyes Are Crying”, Michael Lewis says, “Property bubbles never end with gentle landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to think that house prices will rise forever, they’ll notice what a terrible long-term investment real estate has become and flee the market, and the marketplace will crash.” We agree! Infrastructure and construction spending in China accounts for more than 40% of GDP – lots rarely observed in the past in any economy. Actually, this demand has led to commodity prices increasing in a parabolic curve.
Even onions and chilis went up 64% and 38% respectively this year 2010! We timid from parabolic curves away, so we continue steadily to maintain our collateral hedges! As for China, late in 2011 the Chinese bubble in real property burst. Shanghai – leading to riots by angry customers who paid full price. Expect apartment prices in China to come down significantly in the next few years.