In financial and fiscal sense, no matter how to describe the importance of the collapse of the Soviet Union can not be overstated!
Inflation is always the most central indicator of the global economy, when inflation rises (interest rates rise simultaneously), the demand market will shrink, economic development is suppressed, unemployment will rise, debt crises will emerge, which will eventually lead to the outbreak of various economic, debt and currency crises, and the collapse of the Soviet Union brought about a rare low interest rate environment in world history, which is evident from the historical inflation rate in the United States This conclusion is evident from the historical inflation rate in the United States.
In 1990, the year before the collapse of the Soviet Union, the U.S. inflation rate was 5.4%, and in the year of the collapse of the Soviet Union it was 4.23%, which turned out to be the highest in the next thirty years! Interest rates in that year also became the highest in the next thirty years.
The following patterns emerged during these three decades.
One, a low interest rate environment is conducive to economic development or transformation, which is the most basic law of economics. China took advantage of the low interest rate environment in the 1990s to complete its preparations for economic reform; at the same Time, a golden age of information and electronics industries emerged in the United States.
Second, in the two decades after the collapse of the Soviet Union, there were two phases of high inflation (interest rates) in the U.S. One was 3.38% in 2000 (see table below), which resulted in this inflation (interest rate) high puncturing the U.S. Internet bubble.
The second was 3.84% in 2008 (see table below), which punctured the subprime bubble and triggered the subprime mortgage crisis in the United States.
Third, during the low inflation years of this century, the ten-year average inflation rate for 2010-2019 was 1.774%, significantly lower than the ten-year average inflation rate for 2000-2009 of 2.57%.
In the previous decade of low inflation environment, the U.S. formed a real estate bubble and the Shanghai index reached the peak of 6124 and is still insurmountable; in the latter decade, China’s real estate emerged as a bull and the U.S. stock market, especially the Nasdaq, emerged as a super bull. We don’t know yet, because any bubble can only be proven to be a bubble after it is broken.
But one thing is expected to be certain, once inflation rises near 4% (and interest rates rise with it), it will pierce the inflated asset prices formed in the low interest rate environment, and it will validate that it is a bubble.
I have been saying for the past six months that the future is an era of hyperinflation, rooted in the fact that the current high debt rate of the U.S. government can only be defused by hyperinflation (essentially a monetary reset and a debt reset, the principles of which will not be elaborated), and also from the fact that China and the United States have entered an era of confrontation (analogous to the U.S.-Soviet confrontation). Now, this view is the consensus.
The findings of debt market experts are the most informative in terms of judging future inflation, stemming from the fact that debt market yields respond to the level of inflation. The “new king of debt”, DoubleLine CEO Gonzalez expressed his opinion in a webinar that headline inflation will break 3% this summer and stay above that level in the coming months. The Fed has chosen to be indifferent to inflation exceeding 3% for some time,” said Gonzalez. In my opinion, they are not only not worried, but welcome inflation above interest rates. They like negative interest rates because they know they will help stop the incredible U.S. deficit and debt problem (which is the focal point I mentioned several times earlier and is a hurdle the U.S. government and the Fed can’t get past).” He also added:- “One can actually reasonably predict that headline CPI will probably exceed 4% at some point in about four months.” The corresponding point in time would be the third or fourth quarter. If monthly inflation in the U.S. follows this trend and the second half of this year and the first half of next year are treated as an annual event, the “annual” inflation rate should be close to 4%.
When the U.S. inflation rate reaches or approaches 4%, it is likely to pierce the inflated asset price system created by the low interest rate environment over the past decade.
The current spread between the U.S. and China is about 170 points, at which point it is expected that China’s one-year lending rate will likely rise above 7%. The only market adjustment (excluding policy “air conditioning”) in Chinese real estate since the turn of the century was in 2008, when the central bank raised the benchmark one-year lending rate to 7.47% in December 2007, a direct “killer” of the 2008 stock and property market crash. “. Once interest rates rise again to this level, coupled with the demographic factors to support the property market decline, the results can also be predicted.
Wu Xiaoling, former deputy governor of the central bank, said: The days of reveling in the bubble are numbered, and being prepared for the tide to recede is a reality that every country and every person must face. This attitude is a very realistic and responsible attitude. Real estate is a typical cyclical industry, and the price system formed by the long-term low interest rate environment will be punctured once inflation appears to rise significantly, so this caution is by no means superfluous.
Then look at the fundamentals of domestic real estate.
In the past two or three years, it has been repeatedly said that “peacocks fly to the southeast”, because as the economic competitiveness of the southeast coast becomes stronger, the competitiveness gap with the mainland will continue to widen, capital and labor will flow to the southeast coast, forming a pattern of economic strength in the south and weakness in the north.
Although the government has been strengthening its investment activities in the northeast, northwest and the wider mainland to alleviate the disparity in the level of economic development between the regions, these investment activities may help to alleviate the economic pattern of the strong south and weak north in the short term, but the effect is doubtful in the long term: first, as infrastructure and other infrastructure become more saturated, the rate of return on investment decreases and the pulling effect on the local economy decreases; second, in recent years, the fiscal situation has changed from surplus to deficit. Several years of fiscal surplus to deficit, and then the deficit is gradually expanding, so that the fiscal investment capacity to decline; third, the many factors that cause the economy to be strong in the south and weak in the north, part of the humanities and other intangible factors at play (which is likely to remain the decisive factor), financial investment does not change the gap in the soft environment.
In the end, the pattern of strong south and weak north will only deepen, as a result, the population, especially the young labor force will continue to migrate to the southeast coast, and even accelerate.
And real estate will always be a demographic behavior, which determines the trend of real estate. So, in the past two or three years we have seen the property market in Shenzhen Dongguan and other places stay hot, while in the northeast Hegang and other places sell houses at a cabbage price, and the Yongqing property market in the Beijing area has been discounted by 70%. 2020 is a year of super easy money, definitely favorable to real estate, but some major cities in northern China (second-tier cities, most third and fourth-tier cities need not be mentioned) including Tianjin, Shijiazhuang, Zhengzhou, Jinan and other places of the property market sluggishness and year-on-year price declines. The cause of this phenomenon is clearly no longer financial factors, but rather demographic factors (but also economic employment and other factors) at play. The change in the real estate environment is evident from the change in population numbers in the seventh census versus the sixth census in major northeastern cities.
Of the 21 major northeastern cities in the table, only four showed population growth in the seventh census compared to the sixth census, and 17 showed population contraction, with cities such as Qiqihar actually contracting by more than a quarter! And with population numbers shrinking throughout the three northeastern provinces, the real estate environment in the northeast is clearly deteriorating.
The famous demographer Yi Fuxian believes that China’s total population has peaked back down in 2018. Some experts may not agree with Yi’s view, but most experts, after seeing the 2020 newborn data, will also believe that the peak of China’s total population has already occurred, at least in the next few years. Also note that the highest birth rates in China are in the economically developed regions of Guangdong, Fujian and Zhejiang, while the birth rates in the mainland are lower than those in the southeast coastal regions. With multiple factors such as population migration and very low birth rates, most cities in the mainland will be, or have been, caught in a negative population growth dilemma.
Once the inflation rate in the U.S. this year as expected above and lead to an accelerated decline in property prices, under the pressure of multiple factors, the majority of mainland cities in real estate is likely to be difficult to appear effective recovery, these areas of real estate as an era is over – this is the cyclical nature of real estate, following the changes in population and change.
Conversely, real estate in first-tier cities, especially in the core areas of first-tier cities, is largely certain to have the potential to recover after a price hit because of its scarcity and, therefore, its partial monetary function (meaning the function of storing wealth). The regional hubs along the southeast coast are also bound to see a recovery in the property market as they will also see new population inflows.
But in general, we are saying goodbye to the era of real estate (urbanization), the future of China will be the era of economic transformation and upgrading.
Where are the biggest risks for real estate in the future?
After the real estate cycle in mainland cities has passed, houses will lose their liquidity, and without liquidity houses will lose their wealth properties, but mortgages will not disappear, and at the same time, more than 70% of residents’ wealth is reflected in real estate, and at this time real estate will turn from a wealth-creating factor to a poverty-creating factor in the past. The southeastern coastal cities still have liquidity in the property market, still have the wealth function, some cities will continue to promote the growth of residents’ wealth because of price increases, the value of each set of houses is up to millions or even millions. The direct result of such a division is a serious deterioration of the gap between the rich and poor residents of the southeast coast and the mainland, and once inflation goes up the poor class will fall into a desperate situation, threatening social stability. At this point, how will the government respond to such a situation? Will it adopt a nationalization policy or push some cities to implement real estate taxes first in order to bridge the gap between the rich and the poor? This is the biggest variable in the future. In short, this serious deterioration of the gap between the rich and the poor must be solved, otherwise society will no longer be stable.
The risk of U.S. stocks is mainly reflected in the NASDAQ, stemming from the overvaluation of major stocks, while the risk of the Dow or relatively low, stemming from the fact that commodities are likely to have entered a new super-cycle, allowing cyclical industries to benefit greatly. The blue-chip stocks of the Dow, mainly from cyclical industries, will rapidly increase in valuation, forming an obvious hedge against the upward pressure of inflation on the Dow.
Long-term low inflation (low interest rates) will form an inflated asset price system, inflation (interest rates) is the knife that will bring it back to the ground when inflation bumps up, which is the constant rule.
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