Puru Saxena’s alarm rings true

Back in March, I posted an audio interview with Puru Saxena, who runs Puru Saxena Wealth Management, an established money management firm based in Hong Kong. Saxena produces the monthly Money Matters report, which follows economic, historical and geo-political trends, and explores investment opportunities in unpopular and distressed markets.

It was a fascinating interview where Saxena raised the alarm on China, arguing that there would be a pull-back in Chinese economic growth within a few months. He was also extremely worried about the euphoria in the Chinese and Hong Kong housing markets, describing both as a “severe and gigantic bubble that is going to end very badly”.

Saxena noted that China’s housing value to GDP was around 350% of GDP, which is only slightly below the peak value reached by Japanese real estate (370%) just prior to its collapse in 1990. Similarly, Hong Kong’s housing value to GDP ratio was around 330%, which is above its peak level reached just prior the Asian Financial Crisis in the mid-1990s.

Regarding Australia, Saxena warned that base metals prices (e.g. iron ore – Australia’s biggest export) could collapse following a significant decline in construction activity. Mining companies, most notably BHP, RIO and Vale, would be hit hard, as would the Australian economy. Saxena believed that any slowdown in China would likely prick Australia’s housing bubble, which he claimed has reached “absurd levels”.

Now Puru Saxena has returned with another audio interview on Financial Sense (click to listen). This time around, Saxena argues that there is no such thing as a ‘soft landing’ in China. Whenever an economy experiences a massive boom, as China has, it is always followed by a large bust.

“You don’t have a once in a lifetime bull market in property and the you expect a 5-10% correction. Historically, at least, this has never occured. And I believe that the Chinese property market is on the cusp of a big decline. And the reprecussions of this bust are going to be felt in the commodity markets all over the world. The countries which export to China are going to feel the heat – Australia, Brazil, etc, and the fact that the Chinese stock market is now at a multi-year low is a clear sign that all is not well in China.

Smart money has been selling this rally for the last year and a half… and I don’t know when this carnage is going to end, but I certainly would not be taking any [long] positions in China at the moment.

Saxena also believes that the US Dollar is going to rally quite strongly on the back of global distress due to its status as the world’s reserve currency.  He expects to see a ‘big event’ in Europe over the next few months. And when that occurs, the Euro is going to implode, taking down all the risky assets with it – precious metals, stocks, commodities, high yield junk bonds, etc – and the US Dollar is going to rally.

Importantly, Saxeena believes that anyone long in risk assets over the next few months – commodities, stocks, precious metals, high yield junk bonds – is going to get burnt. Saxena’s theme at the moment is defence – protecting capital. “We are in cash, in the world’s senior currency, and we are shorting a variety of stock and credit items”. All the risky assets are now below their 200-day moving assets, which is a sign of weakness and signals that the trend has reversed.  The place to be is the US Dollar and if listeners want more risk, they can short risky assets.

Special thanks to Revert2Mean for providing this link.

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  1. Makes no sense.

    Why sell everything to put money into the $US? The incredible unpayable accelerating debt in the USA is going to cause the mother of all collapses. I hope Saxena isn’t talking his book or worse still doing a GSachs and selling out of $US.

    As the Euro declines in value as the printing starts the USA is sure to follow just to keep its currency down.

    We all know this is going to end badly but I doubt if he has the solution.

      • Yup to UE!
        Then again it might be safer and not quite as rewarding to hold Gold.
        I mean in the US what would you buy? I was watching last night and thinking there might be 10 or 20% for us in buying a few Oracle while they are down. It was just idle speculation 🙂

  2. UE, I’d not heard of this guy until yesterday when I was sent the podcast, and I agree with him on the USD. The flight to safety in the wake of more EU and maybe China bad news will probably occur. I believe that China will do all it can to stop chaos by pulling back some foreign reserves, but as most is in USD’s I wonder how much…they have to hedge as well.

    I totally believe his “long in risk assets over the next few months – commodities, stocks, precious metals, high yield junk bonds – is going to get burnt.” as we can see that looking back to the GFC and other crises.

    The AUD would get hammered IMO. However, while gold will get hammered in USD, the AUD could drop back to 60c so this is worth considering, or maybe better to have a USD account for a portion of your assets during this event.

    my 2c

  3. I have to agree that the USD would be a short term play. But isn’t it ironic that the US should be seen as a safe haven when its economy is just as bad as Europe’s? 2012 could be the year that just about seals the fate of ALL fiat currencies backed by nothing

  4. Someone please note his comments on inflation!!!! Also he left out that the Govts in China are decreeing another round of 23% annual pay increases to follow up on the 20 odd % each year for the past three years!

    Australia ? Inflation problem coming? Nah!!!!! Don;t be damned stupid you mad ole b….rd flaswe…stupid old fool! Lower interest rates to keep the unsustainable growing!!!
    Bewdy she’s right mate!

  5. Just being a bit contrary!

    Actually Gold did not sink out of sight last time. I held Gold but more importantly a lot of gold mining companies.
    The price of the companies sank out of sight but the price of Gold in A$ did quite well.
    The gold mining companies more than repaid me in the aftermath.

    China may slow…perhaps substantially. A bit like the Japanese they owe most of their debt to themselves. I’m not 100% clear what that means but it’s sure better than owing it to everyone else in the world external to your own economy.

    Now 99.9999% of economists don’t understand this. Nevertheless it is true.

    Now, in addition, they are sitting on Trillions (2.6?) of paper USD. They are currently fairly desperate to exchange these for paper dollars. I can’t quite figure out why a slowdown would eat up these USD since, as per above, they owe their debt to themselves.

    So perhaps the flow of foreign money that has kept the illusion alive here for the past decades will continue or perhaps even accelerate.
    OK I agree as commodity prices tank the speculative money would flee causing a bit of a rout in the A$. However I’m thinking our short term pain may be less than otherwise because of the Chinese need to offload the paper USD to some bunch of mugs who will take them in exchange for valuable resources.

    Comments (adverse) more than welcome. I’m just thinking out loud.