Real estate conundrum, Retail sales still well below trend & Don't lose your makers (skilled producers)
Trying to make sense of things
*This is a premium-only post. Thanks for being a subscriber, it means a lot.
On Our Minds:
What is going to replace real estate as an outlet for savings? Apartments, condos and homes are something that just about everyone can have an opinion on by visiting a place or seeing some mock-ups. In other words real estate is accessible and familiar.
We are skeptical of views that the stock market could replace it. Stock investing is far from simple or familiar. Most people’s memory of stock investing is losing big in one or both of the last two boom/busts.
What could replace real estate‘s 20% plus of annual economic activity (cumulating in hard asset creation and subsequent price appreciation that fueled a wealth effect!)? If you have any ideas, please reply/comment.
Real estate can’t be allowed to run too hot again because there are real constraints: affordability and leverage. Either of these could result in a major economic crisis that can easily spill over into a social crisis.
“Warfare is not a spreadsheet, it is a conversation.” - Mike Martin
Contents
I. Real estate conundrum
There are a number of great pieces out recently covering China’s real estate conundrum. In this section we begin with excerpts from the following articles, then move onto some data and the disparity in recovery.
China Property Bonds Looked Cheap at 20 Cents on the Dollar. They Weren’t. - WSJ
China Bet It All on Real Estate. Now Its Economy Is Paying the Price. - NYT
Attributed quotes from WSJ and NYT pieces below.
A long road to get here
How the real estate market came to be at the center of China’s economy was long in the making. For years, everyone bet on housing. Local governments lined their coffers with the proceeds from selling land. Families invested in apartments. Jobs for builders, painters, landscapers and real estate agents were in abundance. (WSJ)
No way to stop without tremendous pain
“When you have 30 years of rising prices, there is no way you can stop that process without tremendous pain in every part of the economy,” said Michael Pettis, a senior fellow at Carnegie Endowment for International Peace.
Everyone who benefited from the real estate boom — the banks, local governments and households — has a lot at stake. “The political question is, who takes the loss,” Mr. Pettis said. (NYT)
Don’t expect a quick resolution
"Given the uncertainty and state of the property sales, I'm not sure anyone can figure out what a sustainable business model looks like, which is why it's taking so long," said Diwakar Vijayvergia, a portfolio manager at AllianceBernstein. "It's going to be a time-consuming process." (WSJ)
Too big for a market driven restructuring
European and U.S. distressed-debt investors who bought Evergrande's bonds after the company defaulted were hoping for a "rational, market-driven" restructuring, said Kenny Chung, portfolio manager of fixed-income focused hedge fund Astera Capital.
"Now they've realized that the restructuring of a company that is the scale of Evergrande will be overseen by the government and will depend on the government's future design for the firm," Chung said. (WSJ)
