The Largest Asset Class in the World Just COLLAPSED_2.mp4

New home sales in China collapsed by 42% in October when compared to last October, representing more than just another major setback to the beleaguered Chinese real estate market, which just so happens to be the largest asset class on the planet. This is a big deal for banks. It's a big deal for China's economy. It's why interest rates are moving lower all over again, especially how all of this fits together in the situation in China that has changed despite a brief period of optimism that had been sparked by China participating in the AI and tech bubble this summer. China has been grappling with falling consumer spending, which has been held back by the property bust, but is now being further pressured by the widespread realization there is no fixing this. There is no silver bullet sitting around in Beijing. Fiscal this and central bank that, none of it actually matters. And that's the real takeaway from the housing data, at least one of them. After a flatline in September had raised hopes that maybe something was actually working over there, this October figure doesn't just rug pull those hopes, it ends the stimulus craze. That's a huge deal. This new housing data adds to the growing evidence that China's economy is about to get up close and personal with Dr. Beverage and his curve, and that Chinese households know it, which is why they aren't buying anything. Houses are anything in the real economy. Having tried stimulus for years, it is now crystal clear that demand will not be stimulated. Therefore, there's no alternative to what has to happen next. With the housing market dropping like it just did in October, it adds to the growing even mountain of evidence suggesting that China is in collision with the flat part of its own beverage curve. We've talked about and observed a major change in the situation in the Chinese economy this past summer, and it appears as though Chinese households know it and know what's coming next. There is no fixing the situation, and in fact, after 10 quarters of deflation, what else is there? Now, there did seem to be some light at the end of this long, dark tunnel for Chinese real estate last month, when China Real Estate Information Corp reported that the value of new home sales appeared to have stabilized. It was actually up four tenths of a percent year over year in September, which was the first increase since February, and what appeared to be a significant improvement from the nearly 20 percent drop in August. But like we saw in February, or really last October, when occasionally these numbers turn positive here or there, it never lasts. In October 2024, that had the value of new home sales rising more than seven percent year over year, which everyone said was last year's bazooka showing up with quick results. But then home sales turned negative the very next month, and while the depth of the decline did appear to moderate, so that provided some anchor for optimism that maybe eventually the bazooka and combined housing rescue efforts could pay off at some point if China just hung in there long enough. But like everything else in China's economy, the real estate market took a nasty turn during the summer when the government realized it was getting nowhere in the economy. Even if the housing sector decline had moderated, it was not producing tangible results across the broader economy, nor in the all-important banking sector, as we keep pointing out. Chinese banks continued to constrain lending despite the appearance of support and the sentimental encouragement from Xi Jinping's government. So what happened was the government switched its economic priorities right around mid-year. China had been stuck in a deflationary downturn this entire time. Its own very difficult version of, and contribution to, forgot how to grow. Xi Jinping had demanded that the industrial sector help keep China's labor market stable while the economy got it back on its feet following the disastrous zero COVID mission. Companies would be required to keep up production levels even if there wasn't demand for what was being produced. Beijing consciously chose the inevitable falling prices as the cost of trying to force a recovery, but it was only ever meant to be temporary. What is a Uridal University membership? It's where understanding the monetary world isn't a mystery, it's a method. If you're serious about your financial education and you want clarity in a world of volatility and misunderstanding, this is for you. 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So if you're ready to explore master monetary systems, both past and future, with structure, clarity and confidence, click the link in the description to visit uridal.university.com memberships to join us today. The government would implement stimulus policies after they realized reopening itself failed, and they would begin to more seriously tackle the housing bust, and eventually the economy would be able to recover enough demand that prices would be able to normalize without having to suffer lost employment along the way. But after repeated failure to get demand to come back up, one after another after another, especially last year's bazooka, no stabilization in the economy, no stabilization in banking, no stabilization in real estate, in anything, the communists realized they had to get control over prices no matter what else. And this is the part people may not realize, and if they do, maybe they don't fully appreciate. Just using China's GDP deflator, which has all sorts of questions attached to it, it has fallen for 10 consecutive quarters through the one that was just ended, and 11 out of the last 12. So three years of forgetting how to grow and forcing falling prices due to it. And so over those 10 quarters, deflator has dropped an eye-popping 8%. That's utterly enormous for an economy the size and sophistication of China's. You can't suffer that much prolonged decline in prices without it causing massive long-run damage. It undercuts the profitability of production itself, turning what were once reasonably decent businesses into loss-making zombies. That undercuts potential moving forward. And since the stimulus and housing rescues had failed to stabilize demand in China, let alone get it growing enough again, the only way to tackle deflationary prices would be to cut back on production, to reduce supply, and therefore, by necessity, pull back employment. To reverse the jobs focus of the last couple years and to kind of put China's economy through a sort of macro cleanse. In other words, to get acquainted with the flat part of the beverage curve. And that's where the October housing data comes in and its monstrous decline. Showing that once again, Chinese households like American consumers can see what is coming. So earlier on Friday, the same China Real Estate Investment Corp reported that the value of new home sales plunged by 41.9% in October when compared to last October. And as I said in the intro, it wasn't just another setback in housing or just new home sales. And while there's some base effects in that number and just being compared to last year's loan gain, this is a devastating result. In addition to further proving nothing ever gets stimulated, especially when it comes to the real estate market in China, it's also another hard data point which points to the fact that China is experiencing flat beverage more than just possibilities. Chinese homebuyers who have been reluctant the past couple years anyway are now being sidelined by growing concerns over jobs, employment, and incomes. And even if you do find a bank willing to provide a mortgage, no one wants one if the labor market is about to suffer the effects of fighting oversupply. Which is again, nothing more than a code word for forgot how to grow levels of demand. And the sales data is more proof of the effects from the flat beverage transition. Now just to be clear, the flat beverage in China is the same as it is here with one qualification, one important qualification that explains why so much seems to have changed more recently. But beverage overall just simply illustrates, graphically demonstrates that when demand for labor drops low enough, it gets to the point where there isn't even enough demand for the workers that companies have on their books. But the real difference in China is that actual market demand had fallen below that point years ago. It was instead propped up, as I said, by government orders to keep the labor market steady during the reopening and stimulus run. In other words, China was already on the flat part of the beverage curve in terms of actual economic demand, but we didn't see the effect on employment and the rise in unemployment because of the non-economic demands from Beijing. So removing that official policy removes the support for employment, which then means the labor market in China will adjust to where it otherwise would have been, it really should have been, and that means the kinds of hiring freezes that we've gotten way too accustomed here in our own flat beverage environment, plus very likely some degree of unemployment, even if we can't say for sure how much or how fast this normalization to the flat part of beverage curve might take place. And there is even growing concerns about this among various elements in the Chinese system. They're worried that this is actually happening. Last month, for example, an influential group of academics who had written authorities telling them they should not completely abandon these parts of these traditional parts of the economic areas like real estate and industry in Xi Jinping's sort of sci-fi push to remake China into a top tech leader. Now that's the long-run underside of this economic story. China grew to its current stature by being factory to the world, riding the euro-dollar wave of the Great Moderation to industrial powerhouse status. But when the euro-dollar broke in August of 2007 and the global economy fell into its silent depression, that left China with no engine for long-run growth in potential. You can't make more stuff if your customers have no ability to buy any of it. So the Chinese tried to offset that weakness first with a real estate bubble and then to rebalance China's economy to a more consumer-led rather than industrial and investment-heavy model. And none of it worked because governments just don't have the ability to dictate like that. Top-down always fails. Central planning is a complete myth. So understanding that the old China factory model is a dead end, Xi Jinping here in the 2020s has been throwing money and resources at anything that looks like future tech so that China can dominate the future in what Xi Jinping imagines the future economy might actually look like. It's why it's doomed to fail. But even if he could succeed, that's still way off in the future and China has to get there first. That's the part these academics are really getting concerned about. Here's how it was reported last month in Bloomberg. China should support the property sector through fiscal measures according to a group of academics led by an advisor to the country's central bank who urged Beijing to assist a traditional growth driver while fostering these new industries. The argument laid out in an article published last month in the Chinese magazine International Economic Review envisions a framework for studying growth by coordinating industry policies with these macroeconomic measures. While supporting emerging industries across the economy, fiscal policy should in the meantime, in the meantime, quote stabilize important traditional sectors to help them evolve and quote adjust in an orderly manner rather than the growing disorderly manner that we keep seeing all across these macroeconomic accounts and to an extent in Chinese markets. So you can see exactly what they're saying. First, nothing China has done so far is working and that has led the traditional economic sectors like industry to the edge of flat beverage and rather than taking even more radical steps to stabilize them, Xi is off in the sci-fi future even as the data piles up from the summer showing the traditional economy has indeed taken a nasty spill here including now the housing market especially new home sales. So if Beijing has any hope to pull off the sci-fi switch, it can't just abandon the old. The Chinese have to support it enough to keep it from falling completely apart before the new China is ready to go. That's what the Chinese have been doing, managing the decline in the old factory economy, supplementing it with a real estate economy, but now even these academics including a policy advisor to the PBOC, they realize it isn't working and the dangers are growing. This flat beverage will put China into a worse state it won't be able to recover from future sci-fi tech or not. So going back to the article, the emphasis on stabilizing the real estate market echoes calls of other prominent economists for Beijing to ramp up measures to halt a years-long slump in housing after a construction boom ended in 2021 when Beijing tightened credit for builders. The slump is an even bigger worry after the economy showed signs they say of weakening in recent months and the weakening is putting it in a very understated fashion. And those signs of weakening are really just signals of this flat beverage curve recognition which means there is now growing urgency behind the matter because nothing is working and they can't just do nothing about it. That's always the fatal conceit here. The governments can accomplish anything if they just hit on the right policy or the right combination of policies and everyone believes not just in China this is what a generation of people have been led to believe in the wake of the 2008 crisis and the silent depression it unleashed that all our problems related to those will be solved by technocrats. And here we are nearing two decades later and the only thing anyone anywhere has to show for it are the gigantic piles of public debt. Yet this is the part a lot of people have trouble understanding. Despite those gigantic piles of public debt including in China that have been piling up since 2018, interest rates keep going lower and lower and lower. They don't get the depression economics because the idea sounds so completely foreign because all you've ever heard is the economy is booming especially in the west so and China is doing so well just listen to them talk about how strong it is. Nothing could be further from the truth. These are all signs of depression economics unhealthy economies that are getting worse not better including the signs that we get from the interest rate market because interest rates especially on government bonds are growth and inflation expectations that disappear into these depression economics. So back during the brief global reflation in 2013 China's 10-year bond yielded almost five percent at one point that November and after the devastating euro dollar number three that follows especially devastating to China in emerging markets at the peak of the next brief global reflation in 2017 the tens were yielding just four percent so already one percentage point drop just from reflation to reflation and then two years later at the end of 2019 before the pandemic and COVID in the middle of euro dollar number four the 10-year rate was down to now three percent and despite all the hype about China winning the pandemic and benefiting from the supply shock in the early 2020s the 10-year bond never really went farther above three percent meaning total skepticism about all of those claims basically hanging around where it was before 2020. But then as you can see right from the middle of 2021 right when the global economy was supposed to be recovering and inflationary red hot and everything else Chinese government bond rates have been all downhill ever since it was one of the earliest clues that the global economy was not recovering. China was supposed to be leading the way at the time and instead demand for safety and liquidity inside of China were being prioritized a quick return to the depression economics that had dominated the 2010s. But the real slide in Chinese bond yields got started late in 2023 right with the global bond rally because it was a global inflection. Market interest rates like the macroeconomy they're far more synchronized than most people think including China yes China is included in the globally synchronized and after the huge drop in market rates throughout 2024 and into 2025 as of now China's 10-year yields a lot less than two percent. Remember as I said the entire time from all the way back in 2018 China's government has been issuing all kinds of special central government bonds and other kinds of debt and it doesn't actually matter. All that supply gets absorbed and then some rates only go down because the fundamentals of Chinese economy are the same as those in the rest of the world. No growth, zero inflation, only depression economics. We can see the return to those or a heightened risk of those in the action of Chinese bond yields over the last month or so. Now the yield curve had steepened out along with every other curve on the planet see what I mean about synchronized and of course the media claimed it was everything else except that but it didn't matter. Short-term rates remained low and were relatively stable the entire time which is not a good sign either and certainly it is not stimulus. So the Chinese curve steepened a tiny bit got overblown but has since been flattening out here in October as the tech bubble in China dies down and the macroeconomic risks and really the macroeconomic reality gets to be even more difficult to just simply ignore or explain away as something other than what it truly is. So China's bond market like those academics it's not thinking too highly of Xi Jinping's plans nor the increasingly difficult deflationary shape of the Chinese economy and what the Chinese economy has to do in response to it and unfortunately that fits with what banks are doing or really not doing which is lending. Where have we heard this before? Chinese banks are buying tons of government debt safety and liquidity where have we heard this before just like their western counterparts keep doing as well again globally synchronized. It makes sense that there would seem to be stabilization in some of these macroeconomic accounts over the last couple years this slow degradation because the Chinese have said they wanted to prioritize employment and were willing to accept deflation for a short period of time meanwhile they try to stimulate demand to reconcile that imbalance only to find out central governments don't really have the ability to stimulate demand and now China has been they're left with what do we do with a real estate property sector bust at the same time we have deflation in the real economy which means you don't have any demand and we can't do anything about either. The answer is the answer can only be China's flat beverage. The failure of stimulus and housing rescues for the past several years has left the government there with no choice demand is not coming back it's not going to be stimulated the housing bust can't be fixed from Beijing by bazooka. So it's either do nothing and keep churning out more product choosing to accept more price declines in all of the major long-run devastating consequences that go along with it or accept the flat beverage curve and all the data that we keep getting including the latest stuff from the housing market new home sales shows it's the latter and the consequences of China's flat beverage are not going to be contained within China's borders. We're already seeing some spillover in places like South Korea and Japan and in their currencies and that's all in the video link below. As always thank you very much for joining me huge thank you you're at all university members and subscribers and until next time take care