Looking back, many predictions were correct. When I said housing will be in trouble, I was bombarded. Chinese people loves real estate, don’t give me wrong, I do as well. But I had more experiences in real estate. Seeing real estate bubble burst before, I was quickly realized in 2005, that this market is in frenzy. So I started shorting the builders stock, in a trial bases. I lost all of the investments. It tells me how resilient the market can be. I continued with shorting, in later part of 2006, I got all the money back and a lot more.

Housing is like any other commodity, beside short term turbulence, it follows the law of supply and demand. When every one wants to be the real estate investor, bubble forms. This years subprime crisis leads to the liquidity crisis. It squeezed the profits of banking industry. Recent events in Merrill Lynch and Bear Stern demonstrated that. Housing bubble has two legs, the first leg is the easy credit, the second, the loose lending practice. Now with easy credit returns, thanks for the FED rate cuts, the housing may not be revived; for mortgage bond buyers will be extra careful to demand high credit rating on those mortgages. Banking industry will tighten up the lending practice, thereby limit the revivabilities of housing industry.

It is foreseeable in 2008, more ARM will reset that drives waves and waves of bankruptcies and foreclosures. Any FED sponsored bail out program, only will exacerbate the impacts in the late time. Plus, those actions will be a morally wrong that rewards irresponsible consumer actions, banking practices by punish law binding citizens by using middle class saving to bail the financial industry and some irresponsible consumers.

The asset bubbles have been forming in last twenty years. From Reagan years, up until now, the federal debts level is ever increasing. Beside a short period under President Clinton that government had balanced the budgets, the fed debt level rising had never stopped. This debt spending economy is like to borrow from our children and spend today. It looked prosperous, it feels so. But it can not last forever. All kinds of assets, from stocks, to real estate, to commodities, are all rising driven by more and more paper money printing. In reality, we are in the bear market already. The DJ industrial index's buying power, can hardly be at 40% less of 2000’s, even it touched all time high.

So what will happen when this asset bubble burst? Or will it be so?

The clue lies not only at US dollar, it lies at foreign markets. Stephen Roach of Morgan Stanley describes world economy as two locomotive engines, China with manufacturing, US with consumption. China feeds into the US consumption and US consumption boast Chinese manufacturing. The declining dollar drives more and more capital into China that ever flood the Chinese market with more and more liquidity. The prosperity in China is real with this liquidity, but unfortunately, it can disappear within a short period of time.

The real test will be what happens if US consumption slows down significantly. This is happening now. This Christmas and 2008 will bring us the reality of world economy. I think US will enter the recession, no question about it. And more real estate foreclosure and job loss will only exacerbate the recession, a deep one. US stock market will decline significantly. Coming rate cut will have no help but only drives liquidity to the commodity price rise (helped with falling dollar as well), which in turn drives the high inflation, in double digits.

So what can one do to protect his assets? Unfortunately, not much. Some hard assets, such as gold, silver, oils, food, offers certain degree of heaven for inflation protection. Foreign currency, may offer some protection. But as one country’s currency gets stronger, it harms its export industry. So government intervention by selling its own currency to boost exchange ratio is often adopted. Japanese government has been doing so for so long (strangely enough, US has few complains about it).

Now inflation is an assets price driver. When will asset bubble burst? The answer is: assets bubble will burst and it will not come until dollar crashes. When FED is forced to tighten up the credit upon failing dollar, the asset bubble will for sure burst loud.

This deflationary cycle will only follow the inflationary cycle in next five to ten years. But when this deflationary cycle comes, it will vibrate far to reach every corner of the world. I have traveled all around world in recent years. I see an apartment asking 700k euros (US$900k) in Nice, France two years ago; to an apartment in Shanghai asking for US$800k where average income is only about $500 per month or so. So this asset bubble burst will only bring normality to the society. Unfortunately, some middle class people will feel the severe pain for they may lose all their savings.

Central banking system is the culprit behind this inflation and deflation cycles. The so called price stability will be proven to be a a false claim. Those cycles strip the savings of middle class, making investments from real estate to stock market a phantom for many, just like tech bubble in 2000.

How to protect us? We should have real asset diversity. Having foreign currencies in some other country’s denomination, some paid off real estate, some gold, and some stocks that has pricing power. A recession proof business is even better, such as a farm.

We will survive the coming crisis, but it will be a long one, for as a nation we have too much debts. Some say debt doesn’t matter. I beg different. When you neighbor is not interested to lend you more money to spend and you have no savings, what will be the consequences?

Sell our nation's assets to pay off the debts, or declare a war to forfeit the debts. Either can happen those days.