CHAPTER 5

The Greatest Unwind in Economic

History

Early signs indicate that the greatest unwind in modern eco-

nomic history could begin this year in China. For many inves-

tors, the fallout will be painful. If you’re properly positioned

ahead of time, however, I believe you can profit.

To do so, it’s important to understand the dynamics in play.

Bubbles have three consistent characteristics: They are easy

to spot; they persist longer than most investors expect (that’s

why they’re bubbles in the first place); and they end badly

with massive losses for investors who are still in at the top.

These three traits are related in terms of investor psychol-

ogy and behavior. Even when investors see a bubble, they of-

ten cannot resist riding the wave, because they assume they’ll

be smart enough to get out at the right time. The fact that

bubbles last longer than most analysts expect tends to validate

this investor assumption. People waiting on the sidelines for

bubbles to pop are routinely ridiculed by those reaping large

gains as the bubble expands.

But in the end, the bubble profiteers tend to stay too long at

the party and suffer massive losses, as bubble markets can eas-

ily lose 30% or more in a matter of months, sometimes weeks,

as assets are dumped and investors head for the exits. Today,

the greatest bubbles in modern economic history are in China.

China is at risk of seeing multiple markets in real estate,