At the Margin: Where Confidence Is Set or Lost
William Smead submits:
I’ve always felt very fortunate to have received a solid education at Whitman College in Walla Walla, WA. In Micro- and Macroeconomics, we studied marginal supply and marginal demand. In calculus, we learned the mathematics surrounding the rate of change occurring at the margin. We learned that producers and their competitors produce until marginal profit moves to zero. What was so important about the things which happened at the margin?
We at Smead Capital Management have been pondering the interview Jim Chanos did with Charlie Rose on April 12, 2010. He explained to a very frustrated Mr. Rose that the seeds of a credit driven bubble in the commercial and residential real estate markets in China are about to burst. This will happen, he explains, despite the best efforts of the communist government to combat the bubble and ultimately deal with the effects. In this "treadmill to hell", Chanos shows that the bubble in real estate there is as egregious as the subprime bubble we had in 2005-07 in the US.