China And Real Estate Lead The Next Crisis:

The biggest difference in the coming crash likely in 2024 vs. 1929-1932 and 2000-2002 for stocks, is that a second and more-damaging real estate crash will follow the first one we had from early 2006 to mid-2012, in which real estate dropped 34%—and that was worse than the 26% crash from 1925 into 1933.
 

Why? Housing didn’t bubble that much back then, given the prevalence of 50% down, five-year-term mortgages. But I’ve forecast many times that this next crash would be around 50% or higher, descending to the mid-2012 lows, with upscale housing down more like 60% to 70%.
 

I’ve also continued to stress that China is the lead bubble globally when it comes to real estate. It has at least 22% empty homes…no other country has that, as free markets wouldn’t let that happen without a crash in home prices. But China is a top-down, government driven economy – the opposite of free market capitalism. It could have crashes of 70%+, never seen in modern history for real estate. So, how is the Fed here going to stop that, as such an unprecedented real estate crash would clearly reverberate around the world. The following chart included with this article shows that if the Shanghai Residential Property Index of home prices just went back to its recent lows in 2012, it would crash a whopping 74%. That is disastrous. A return to 2012 levels would be 50% for the U.S., much worse than the 34% crash from 2006 to 2012. And note that real estate only went down 26% in the Great Depression as it did not bubble like stocks back then, due to much stricter mortgage policies.
 

One of the arguments regarding Chinese real estate is that their properties aren’t as mortgaged and leveraged and often are not mortgaged at all…But if your home’s value goes down 74%, you are going to be devastated; that would wipe out most or all of your net worth. And imagine if you have a second or third home empty with no income against it—which likely 20%+ of Chinese have—as I’ve also shown in the past.
 

A 74% broad real estate crash would be devastating beyond anything seen in history and would affect the largest group of middle-class households in the world.



























 

BIG PROBLEMS LOOM FOR CHINA

Nothing hurts more than real estate, as it is dearer and more personal than stocks, and it is most often leveraged by a mortgage, although less so in China. Everyday Chinese citizens are witnessing their first real bubble, as they have become significantly richer over a matter of decades for the first time in thousands of years! And they are going to be P!$$ED! They may have been obedient, good citizens until now, but that’s not likely after this shock of a lifetime, the effects of which could last many generations.
 

The only upside I see is that they may finally wake up and overthrow their top-down, authoritarian, bureaucratic government that 100% pushed up this building-for-no-one bubble to keep the economy growing fast enough that no one would question their authority and value. Such a bubble would not have gone this far, with 22%+ empty houses, anywhere else in the civilized world.
 

China is leading the real estate bubble burst even more than the stock burst (after the Shanghai Composite and Hang Seng major stock indices just broke key support recently, as I have covered). And the burst there is going to bring reality and going to trigger bursts globally in this “everything bubble.” How’s the Fed going to stop that?!
 

As a reality test, the question continues to be this: What was your house or real estate worth in 2012 at its low? That is the most likely outcome in the years ahead, and that will be in a wide range, depending on the larger region, price range, and local placement of your home. That’s why 50% is just a general gauge. The clearer you can get about your potential downside, the more you can make the best decision, although most of you still won’t sell your main house. The Chinese have no clue what’s about to hit them! “Riots in the streets” will not be a brutal enough term to describe what could happen.
 

WORSENING DEMOGRAPHIC ISSUES

And to add insult to injury, global investors are losing interest in China quickly. Foreign direct investment peaked back in 2014 at around $105B, declined, and then rallied back into 2022 back to about $102B. But it dropped like a rock into quarter three of 2023, to an outflow of -$11.8T and likely has continued decline since.
 

You can’t have an authoritarian, top-down government in a from-the-bottom-up information revolution and remain the No. 1 or No. 2 country in the world. We’ll see how China shakes out, but I think it’s going to be brutal and we will see a lot of public revolts. I’m not putting China on my vacation travel calendar any time soon!
 

The U.S. has its problems, with the greatest of financial asset bubbles by far and the greatest debt bubble and crisis in its history brewing. The whole world has massive debt problems that need a detox! The whole developed world is slowing (due to declines in births as these countries became more affluent) and now is starting to shrink. And the government giving $5,000 bonuses for each kid in a family will not begin to offset the massive $300,000 needed just to get the average kid though high school here in the U.S.




















 

SHORT TERM U.S. TREASURIES

East Asia’s decline is just the beginning. Southern Europe is nearly as bad demographically and is even less innovative. They crave the good old days they aren’t likely to see again. Eastern Europe is also facing demographic decline and is even less innovative than western Europe, not to mention that Russia is threatening to try to take over some of those countries again.
 

The good news here is that we will finally shake out the record debt levels and zombie companies…Hunker down now and don’t let your company be one of them. You can come out of this crisis with stronger market share as your competitors fail. For investors, get into the 30-year and 10-year U.S. Treasury bonds just for 2024, and perhaps into early 2025. TLT is an ETF that holds average 20-year Treasuries. TLT was one of the few ETFs that spiked strongly in the late 2008 financial crisis. This spike will be even larger. It could double in value in less than 2 years…then you sell and get back into stocks, real estate and risk assets for the Millennial boom into 2037 in the U.S. and into the 2050s in Asia.   EG