In all economies there is a cycle, but the understanding is when does the economy move from negative to positive. For the average person in the economy, there has to be hope the market improves. For the investor with options, being aware of lower asset values and when will the market is expecting to move and advance positively is the holy grail of investing or value investing.

China has the second largest economy in the world but it has a large problem – the real estate market. The government spent on infrastructure and the country has some of the best infrastructure in the world, but China allowed the property market to be 25% of the economy. In an article written by James Griffiths of the Globe and Mail and Alexandra Li of Reuters, according to official data, China has some 390 sq m of completed and unsold homes, equivalent to 6.6 Manhattans. One survey found the number of properties for sale was 20 times higher than the number of transactions that month.

A property bubble in the 2000s and 2010s saw local governments across China make vast amounts of money selling land to developers, who paid hefty premiums safe in the knowledge that apartments would be snapped up by investors. The property sector has grown to account for 25% of China’s GDP and a staggering 70% of all household wealth.

The biggest property developer was Evergrande defaulted on $300 billion in debt. Resales have fallen 7% year over year as well the price of new homes has fallen 11%.

China’s central bank has set up a $42 billion fund to buy excess inventory with the intention of turning it into affordable housing.

In a book called Banking: A very short introduction written by John Gooddard & John O.W. Wilson, published by Oxford University Press, 2016, the authors outline some of the previous panics and how long they took to recover. The Swedish Banking crisis in 1991 – it took the Swedish government to guarantee all bank deposits and creditors of 114 Swedish banks. The initial cost of the rescue was 4% of Swedish GDP.

The US Savings and Loan crisis in the mid-1980’s resulted between 1986 and 1995 more than 1,000 savings and loan companies was subject to closure or some other form of resolution. The US government step up the Resolution Trust Corporation in 1989 to allow slow disposable of the assets of the failed Savings and Loan companies.

The Japanese banking crisis end after a boom in property values which ended in 1990-1. Following a weak recovery in mid-1990’s, Japan felt a further downturn at the onset of the Asian crisis in 1997. For 2 decades, the Japanese economy experienced a protracted deflationary spiral.

The global financial crisis of 2007-9, mortgage-backed securities were held in portfolios and banks around the world and they all lost value. You can be the judge when the economies finally left the losses behind.

Linking to dividend paying stocks, economic cycles happen but if there is a crisis, to recover from the crisis will take time, but if you can invest when things are reasonably weak, you will be reward when the economy improves. Banking is about confidence and in a crisis very few people have confidence. One thing you can be confident in as holding stock in a profitable company that can pay dividends. The price of the security will likely fall, but the company is paying a dividend and one way you can use the dividend is buy more of the shares or average down. At some point the shares will trade at a higher multiple than the competition and you will be rewarded.

There are more questions than answers, till the next time – to raising questions.