Blue Marble Sustainable Investing

If it Looks like a Duck - Chinese Real Estate

Its not like we have not had our share of bubbles in North America. And we are not unfamiliar with the results. But what happens when a bubble on the other side of the world collapses and its effects ripple like a tsunami the world over? This is what is happening in China right now. And like the real estate collapse in North America and Europe it is following the same pattern.

Chinese real estate is perhaps the most expensive on the planet. At an average of $ 1,160 USF per square meter against an average annual family income of about $ 7,500 USF per year it is almost 5 times more expensive than New York at $ 2,059 and $ 72,000 respectively.

China has been putting the brakes on real estate lending and has implemented some measures designed to let the market cool but at this stage, very similar to the 2008 real estate markets in the United States and Europe, speculation is rather rampant.

The debt loads behind the real estate market in China are lower than the US and Europe but at the current price levels real estate has a long way to fall even if it were to fall in line with Tokyo or New York. However it may just be that there are enough wealthy speculators to keep the market going for a long time but the end result will be a crash. Signs of collapse are already starting to show in prices and everyone, including the Prime Minister are stating that China has a real estate bubble.

So if European and North American debt levels were not enough to give investors serious pause for concern, the potential for a Chinese real estate crash should be. Where do you think they get all the commodities and durable goods to produce all the materials required for putting up massive real estate developments? That's right, a lot of it comes from North America and Europe as well as Asia.

European and North American consumers helped create the debacle that is China and it will be European and North American consumers and businesses that pay the price when it has its first major collapse.

Debt, Debt, and More Debt

Debt is the modern slavery. And it is debt that will be the cause of the major issues this planet will face in the next 5 years. Despite having thrown over 2 trillion towards the collapse of 2008, it will seem an almost comical response in the next few years were the results to follow not so potentially devastating.

A review of the period leading up to and during the great crash of 1929 is instructive as it is chillingly close to the events that have transpired from 2008. And while many current commentators have referred to the Great Crash and then in the same sentence dismissed it as not plausible that the same series of events could occur today as those leading to the Great Depression did in the past, it remains to be seen if they are correct or like the great economists of the 1930's completely and utterly wrong.

The Great Crash was brought on by the bursting of a highly leveraged asset bubble. The New York market fell 48% to 198.69 from its high of 381.70. The following year it regained 48% as it moved to 294.07 and from there, over the next three years it fell to 41.22. If you look at the current record for 2008 to 2010 the results are stunningly close with the exception that we are currently holding the gains made in 2009 but the spectre of a debt laden world starting the taxation/inflation/cost cutting cycle is growing larger by the day.

Japan now borrows to pay its interest. The European Union is treading a razor sharp line with its rescue of Greece and its support of other debt laden members. In essence the plan is to borrow to solve a debt problem. And at the same time they have to stop spending and increase taxation. The US has increased its national debt at an atrocious rate. The ANZ countries are no better. The only countries not facing this crushing level of debt are the countries where we have been sending Petro dollars or Wal-Mart/K-Mart/Any Mart dollars.

And it is not only countries that are awash in debt. Citizens in these countries are also in debt up to their noses. In the UK, combined personal debt is greater than the GDP of the country. Where do you go from there? During the Great Crash it was not the initial fall that hurt the economies of the world. It was the de-leveraging. And while pundits in 2008 to 2010 have been and can still be heard saying "that was then and this is now" and that the money that we literally threw into the various economies would help prevent the same thing happening, it still remains that it was all debt and that debt must be repaid.

Debt is slavery and like the emancipation of the slaves in the US, freedom comes at a price. In this case it will be years of higher taxes, reduced spending, and much slower economic growth. Sadly, we all did this to ourselves and we will all have to take responsibility.

EU Rescue Package: False Hopes

On the weekend of May 08, 2010 the finance ministers of Eurozone countries and representatives from the IMF came up with a debt stabilization plan worth Euro 720 Billion. The idea is to provide loan guarantees and bi-lateral loans for members of the European Union that run into trouble with their debt loads. The most recent being Greece with Portugal, Spain, Italy and Ireland looking to run into trouble based on the yields their bonds were commanding in the bond markets.

Is it me or does anyone else see the folly of this grand plan? In essence the plan places all the citizens of the European Union on the hook for the profligacy and poor fiscal management of the citizens in countries that have intentionally or unintentionally run up huge budgetary deficits and the corresponding debt loads in relation to GDP.

Member countries are not supposed to run annual spending deficits of more than 3% of their GDP. Well all of the Euro countries are doing that right now and in the process building up huge debt loads. This is welfare statehood at its best. And how do they plan to get out of the situation? By coming up with a scheme that uses more debt issued by countries that can or cannot afford to and then using that debt to provide funds to countries that have completely messed up their finances. In essence where it was a few countries digging their own fiscal graves it is now all Eurozone countries in the same pit helping the others while at the same time not realizing they are digging their own at the same time.

Historically, when countries have borrowed in essence to support their currencies, the programs have failed miserably. This will be no exception. While the countries participating can agree to these lofty ideals and financial support, under the European Union there is no ability to monitor whether or not beneficiary countries are actually meeting their targets for debt reduction. This means that there is a source of funds with no accountability or consequence for failure. 

There is no doubt in my mind there were a lot of very smart people in the room that weekend. But the lack of common sense was truly astounding. Here is a simple proverb that if followed by everyone on the planet would make sure these situations never happen. "The man who makes one dollar and spends 99 cents is a happy man and the man who makes one dollar and spends one dollar and one cent is an unhappy man." Try it, it works.

Gulf of Mexico - Oil Spill

By now you will likely have heard of the events transpiring in the Gulf of Mexico. As we write this the spill has been growing at the rate of 5,000 barrels of oil per day. A British Petroleum offshore oil rig caught fire, exploded and sank on April 20th. Just two days before Earth Day.

What is disturbing about this spill is that, unlike a tanker spilling oil, there is no finite amount that could spill. It was initially stated there was 1,000 barrels a day spewing from the well head at the bottom of the ocean, a mile down, and that robots were being used to shut the well off. That initial assessment has evolved to the current situation where oil is leaking from three areas and at a rate of 5,000 barrels per day. And to add to the problem, it is estimated that it may take up to 90 days to fix the blowout.

Now oil spills in the Gulf of Mexico are not news. They occur with alarming frequency but they are typically contained fairly quickly even though any oil spill is unacceptable. However, this one is charting new territory. The well head is a mile down. It is leaking uncontrollably. At its current rate it will surpass the Exxon Valdez disaster by June 10, 2010. By the date it is expected the leak will be stopped, 90 days from now, it will be TWICE the size of the Exxon Valdez disaster.

Frankly, our opinion is that British Petroleum has no idea when this will be solved. There is the potential, and we have no other information other than our opinion, that this well could run uncontrolled for a long time. Even using the BP figure of another 90 days to solve this problem we (and yes I mean WE as in everyone who uses petroleum products) will have created one of the largest environmental disasters ever on this planet.

From my perspective the questions are "What will it take before we commit to serious changes?" and "How big of a hammer has to hit us on the head before we stop this nonsense?". From an investment perspective it is leading our firm to assess whether or not we want to invest in these firms at all no matter what their ESG ranking is from any assessment. I can bet you have an idea of where we are headed with that decision.

Trevor Giles