Five years from now, the year 2016 will mark the beginning of America’s recovery. That is very good news. All countries go through long-term economic cycles that must be respected. Make no mistake, America, with all of her problems, with all of her incompetent, greedy, irresponsible, elite leaders, with all of her deeply flawed banking and trading practices, is still a powerhouse — is still by far the world’s largest economy, a resilient and dynamic force in the world politically, economically and militarily. Add it up. Rome will not burn while Nero fiddles. Rome will transform, Rome will reshape, Rome will respond. Rome will never stop being Rome. Rome will always be a powerhouse on the global economic and political stage. That is America now and in five years. Maybe not for reasons you think, nor like, nor appreciate, nor agree with. Too bad. Indeed, they didn’t ask you, and less and less is your power to get involved in any of it in a meaningful way.

If this is my vision and position, that five years hence marks the beginning of recovery in America, I must offer core reasons supporting the argument. What will be the catalysts to change? Indeed, as a falling euro would make me want to take my true love to Europe for the month, a falling dollar makes me want to choose America instead. In five years the USD index will be sitting in a new-low range of 60-70. The argument that a further falling dollar will cause inflation doesn’t matter because on the Asia Pacific side, there is inflation too. Inflation is inflation for everyone and it is nothing new. There will be wild asset-swings along the way but as the dollar falls, foreign interest and money will roll in on a broad scale. The trend is already in place and now I move the romantic argument of where I can have my cheapest holiday to the business front, sharing the story of the “Invest America” event which recently took place here in Shanghai at the Grand Hyatt in Pudong.  In this world, the world most Americans don’t spend time thinking about, is the world of “invest in America.”  Amen to that. Amen to the Chinese who are so filthy rich with cash that a tour group of 50 needs four hours to make it through customs because every one of them is carrying a bag of cash they need to declare — cash which, by the way, is mostly likely uncounted in China’s GDP figures. For the rich Chinese who can easily invest USD $500,000- $1,000,000 in the EB-5 investment visa residence program. Do you think they are investing in Malaysia, where they can get a green card by investing only $35,000? Of course not. They want America. They love and want many of the great things about America.

One Rises, Other Declines

It is not farfetched to recognize the rise of one region of the world balancing the decline of another. This is expected in the course of longer term economic and societal cycles. Let me tell you bluntly: Even as America has her problems, to any Chinese, an American passport or green card is the holy grail of freedom. The word for America in Chinese is “Mei Guo,” which means beautiful country, and the newly rich Chinese want America. They see it and they will buy America piece by piece, ranging from macro banks to local houses and stores. They will own more and more of it. As Europeans came in the early 1900’s, the Chinese will come in our age. They don’t need to cross the border illegally without money as many from Mexico because they have plenty of money. They, the Chinese, the Asians, will diversify American society with a rising percentage of Chinese and Asia population because in the future America will be the place to be once again. But in fact, even now America is already the place to be for the “new” crop of immigrating Americans from rising Asia led by China. They are thrilled to be capitalizing on America’s problems, to be buying up America’s assets on the cheap. They would expect American government to start offering more and more legal incentives and breaks to attract more investment; and indeed, that trend is already in place.

If you think Donald Trump getting his breaks to invest in a declining New York City was a big deal, imagine 100,000 Chinese Donald Trumps doing the same thing. Let’s note that, according to Forbes magazine’s 2011 list of billionaires, the U.S. leads the world with 413, up from 403 last year. China now has 115, but that’s up almost 50% from 64. At the USD millionaire level, the number of Chinese millionaire households is reported to be 670,000.  But Rupert Hoogewerf, founder of the Hurun report, and I agree that those numbers are still off by half, mostly due to the enormous amount of hidden wealth in greater China. The other significance of the point is that the vast majority are newly wealthy and have the “conquer the world” attitude that goes with new wealth. So then, some have asked, why would they invest in America? For two reasons, both strong and intertwined; because they are pragmatic opportunists who love a bargain, and because they still see all the advantages and great things about America through a romantic eye, even with the current issues upon us. They keenly have their eye on America — trust me, believe me, they do. They see China’s problems, all the rottenness of China as clearly as most readers at Rick’s site see the rottenness of America. And so they have a very high level of interest to diversity, to protect themselves via such diversification as establish life and business and investment across the Pacific in America. Be thankful for the economic power that the rise of Asia led by China will bring to America’s shores in the coming years, in her time of need, in her need to recover from an unprecedented — and yes, shameful — debt hangover. The next five years will be rough but will gradually also build the foundational trends over the next five years leading to rebuilding, restructuring and new opportunities that will emerge. This incoming wave to America also applies at the academic level. Who are the high scoring students in college? The Chinese, the Asians. Where do they want to study more than anywhere else? America.

Verdict: bye-bye world?  No.  It’ll be Asia Saves The Day As The Dollar Falls to Attractive Levels. Five years from now, today’s declining America is well on the road to recovery due to the continuing trend of a falling dollar with rising inflow of interest and investment, much of it from economically rising Asia led by China. Doomsday for the USD? Nonsense. Never. Ridiculous. All assets, economies and systems are far too intertwined. By the way, much the same for the state of affairs in Europe; declining situation for so many, but the euro isn’t going to dissolve.

The Very Bad News

The very bad news is that before America’s meaningful recovery begins in five years, encouraged by a falling dollar with rising incoming foreign interest and investment, the jig is already up, the decline is already in place and it is falling squarely on the middle class of America right now. It is infuriating, it is shameful. Over the next five years, the decline will continue. Products and services around them will become more expensive, while opportunities to improve life and career will continue to decline. The jump across the canyon to the more secure side of the society will grow wider and wider.  This subject can be expanded upon from endless points of view.

The solution for those in the wrong place at the wrong time — for anyone who does not have money but has a sufficiently entrepreneurial spirit combined with desperate need, is to focus on how to sell anything to the people who do have the money, including the incoming Chinese. This is why all of us remind Washington to beef up the National Exports Initiative program, purposely focusing on exports to greater China, build exports, build up new manufacturing sector, creating jobs. That’s a genuine by-the-book solution. (Note to readers: greater China includes mainland, Hong Kong, Macau and Taiwan.)  The trick will be to identify the more secure upper-middle and upper-income people who are buying; to find out what they need and want; and to do your darndest to position yourself to sell it to them. Since your job prospects are miserable, you may as well give it a go, including partnering up in small groups to form small companies, opening stores on Amazon, Alibaba, Taobao, etc. Identify what the incoming Asian money is investing in, and figure out a business plan — a project to offer them to do business with you. This does not help the many middle-class folks who are not inclined toward or capable of moving forward. For the group of 50-100 million lower- and middle class Americans who are truly stuck, the budget retail industry will flourish, supported by government programs, continuously expanding food stamps and other social support programs, so that they can at least get by. Walgreen’s 2-for-1s and Filiberto’s fresh-but-really-cheap burritos mark the budget lifestyle. This aspect marks the rise of the lower-income Asian lifestyle in America by necessity: families sharing residences, renting out rooms, eating  basic low-cost meals consisting of noodles, rice, meat, beans, veggies. Second cars will continue to decrease in numbers while bicycle and scooter counts will rise. Merchant thinking will rise and small, cheap-to-open local stores and flea markets will pop up, like the shop-houses of Latin America and Asia. As covered here earlier, more will go to gardens, fresher and cheaper, for food. Meanwhile, taxes for the rich must and will rise.

Verdict:  America becomes a completely different place than it was, marked by the decline of the middle class, making the next five years amongst the worst in American economic history for that strata of the country. Yet, the rest of the population and society, as if one could easily imagine that vivid separation and marginalization, continues to thrive, with plenty of wealth and job security to weather the economic storms.

Food, Oil Can’t Go Much Higher

Meanwhile, more on the equity and economic side of the picture in five years. The S&P will roller-coaster but end up close to where it is now, if not 20% higher. Same for the Hong Kong/China indexes. Interest rates will rise, but not by much – and so will oil, because the world economy cannot withstand oil at too high a price. The agriculture commodities have peaked now and won’t be higher five years hence. These items won’t be higher because they can’t be higher.  The gold/silver complex will continue to rise toward those $2000/$100 targets or more. The Chinese RMB will still not be a free-floating trading currency. The rich elite are greedy but not so stupid as to ruin it for themselves.  And so, returning to a statement I made in Rick’s forum many months earlier: In the face of potentially higher USD, Treasury and other bond yields worldwide, pieces of the sovereign debts, pensions, Social Security, etc. will be somehow set aside, forgiven, defaulted, dissolved off the books, renamed, re-categorized, hidden, re-classified, adjusted with more mark-to-market type shenanigans – whatever.  They’ll make new choices, new policy announcements as needed, to keep the global economic system going. They’ll make those choices as needed at the time to avert “disaster”.

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Currently, home values in the United States equate to roughly $15 trillion. The mortgage debt on those homes? 80%, give or take a few percentage points. Home values in China also equate to roughly $15 trillion, however the mortgage debt on these homes (and we’re referring to lower and middle class only) happens to be a bit lower than that of the United States. The number? Zero!

It is easy to suggest that this astounding economic insight better enables us to grasp the underlying forces impacting the economic power shift we are seeing from West to East. As a quick side note on the subject of debt, let’s also take a moment to remember the positive effect the judicious use of debt has had over the past 50 years. How’s that you ask? In truth, most of the global expansion that has occurred over the past 20 years, would not have occurred without the U.S.’s debt financed spending binge so let’s not pretend otherwise. Countries love to complain about the amount of debt the United States has accumulated, but they have also enjoyed “going along for the ride”.

Based on GDP, the economic power of Japan and China lag far behind the U.S. at only $4 trillion each, followed by Germany which currently sits in the $3 trillion range. Maybe if countries such as Germany which leads the Euro block, had been willing to accept higher debt levels as a growth driver, then German GDP would also be proportionately higher? China has also done more than its fair share of racking up serious debt loads via broad-based economic stimulus lending during these past few years. However an enormous differences lies in that Chinese lower and middle class households stand admirably alone as 30% plus cash-rich savers are bursting with a far less talked about piece of the world’s economic puzzle; trillions in mortgage-free, fresh home equity.

The Miracle Of China’s $15 Trillion In Home Equity Power

Let’s argue for a moment that the U.S. mortgage – China equity numbers we started with could be too general or generous to be meaningful. However, digging deeper to the history of property appreciation in the U.S. and China, that argument falls flat fairly quickly and for an amazing reason. A key economic growth curve which required 40 years in the U.S. economy has run its course over a much shorter 10 year period in China. What looks like an economic miracle is really no more than the top of mind, exciting, yet vexing subject in today’s world known as the accelerating rate of change. Accelerating rates of change are a characteristic of this generation broadly impacting our lives.

United States Middle Class Home Equity and Mortgage Levels

U.S. middle class suburban home prices starting back in the 1960′s were in the range $30,000 to $60,000. Those millions of homes today fall in a price range property value of $90,000 to $250,000. A time span of over 40 years was required to achieve that range of 3 to 8 times appreciation in price; a long slow appreciation curve. Can we confirm that the average home equity is perhaps in the 20% range currently? Yes we can. 30% of homeowners in the U.S. have no mortgages. The remaining homes with mortgages barely have a dime of equity with most reports indicating that 30% of U.S. home owners are upside down in their mortgages.

China’s Middle Class Home Equity

Now let’s take a look at China’s home property price appreciation curve. Property value appreciation that took 40 years in the United States has occurred in China in just 10 years. That unprecedentedly steep curve in China’s economic expansion explains a large proportion of the rising shift in economic power towards China. $15 trillion of home equity with no mortgage debt lends even more light on our global new reality. Imagine how much better shape the United States would be like if 50% or more of households were free of their mortgage payment.

Comparing Home Values in China

Looking back only 10 years to 2001, China’s 1st tier cities such as Shanghai, Beijing, Guangzhou and Shenzhen had similar local apartment prices as the United States did in the 1960’s, falling in the range of $30,000 to $60,000. Home values in the mainstream 2nd tier cities such as Dalian, Shenyang, Tianjin, Chengdu, were lower by half again, more like $15,000 to $30,000. A couple of quick calculations tells us those prices translate into the $30 to $75 per square foot range.

Follow Up:

Those millions of typical, middle class apartments all across China are mortgage-free. Did you know that home mortgages, let alone credit cards, hardly even existed in China in 2000? They probably didn’t even have Chinese characters back then for the phrase “credit cards”.

Only 10 years later, property in the 1st tier “property bubble” cities have increased in value an average seven-fold from the $30,000-60,000 to $200,000-$400,000. While in 2nd tier cities, property prices have increased a much more reasonable four-fold from $15,000-$30,000 to well within the $60,000-$120,000 range across a much wider swath of Chinese daily society. Considering normal long term global economic cycles, inflation and property values, the $60,000-$120,000 price range is likely to act as a minimum long term price range floor for those millions of households.
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