Yes or no?
Every major corner of the world's economies is sitting on a knife's edge of
one type or another; the question becomes who falls first triggering the next
leg down in the Global Economies and ongoing depression. All are in debt spirals
as deficits and debt compound at a high rate, while the growth to service them
is but an illusion of official account measures, public sector growth and understated
inflation.
Waves of insolvency are just waiting to strike as elites, academics, government
servants and banksters worldwide cling to the dying Consumption, asset-backed
economic model created at Bretton Woods II. Before that time, the developed
world created wealth the old fashioned way: they produced more than they consumed
creating savings for allocation to productive enterprises, also known as capitalism.
Now growth is measured in how much you can consume creating a top line while
ignoring the amount you borrowed from future income to do so.
"Men, it has been well said, think in herds. It will be seen that they
go mad in herds, while they only recover their senses slowly, and one by
one." - Charles Mackay, Scottish journalist, circa 1841
VERY FEW realized at that time that CLOSET socialists in developed world capitals,
elites, and the banksters that owned them had fully captured the printing presses
and fractional banking systems which had just been UNCHAINED from any form
of REAL reserves. And, that going forward, the economic model would be the
consumption of wealth rather than the production of it.
People had semi-sound money and the ability to save money, which held its
purchasing power in a far superior manner than the IOUs called money today.
Capitalism created the greatest piles of wealth and broad, rising middle classes
in recorded history. Money now is nothing more than a confiscation device used
by the powers that be to rob their constituents of the fruits of their stored
labor.
Henceforth, consumption reported as growth fueled by borrowing from the future
became the model. A borrowing spree began which has now morphed in a government
policy to borrow money with NO INTENTION of ever paying it back while telling
the world it is RISK-FREE when, in reality, mathematically, it is ALREADY worthless
and the world is just waiting for people to WAKE UP.
This model of debt/leverage masquerading as growth, welfare states using the
printing press to feed the people as economies collapse under socialists policies,
and continuous currency debasement (theft of the stored capital in the savings
of the private sector) are to fool the people and useful idiots everywhere.
"There is no means of avoiding the final collapse of a boom brought about
by credit expansion. The alternative is only whether the crisis should
come sooner as the result of voluntary abandonment of further credit expansion,
or later as a final and total catastrophe of the currency system involved." - Ludwig
von Mises
Every developed economy and many emerging economies sit directly in the crosshairs
of this simple statement. The debt orgy continues and shows no sign of abatement
as the BIS recently published a paper outlining that over $30 Trillion dollars
of debt has been issued since the Global financial lows in 2008. What is $30
trillion in terms you and I can possibly understand? 30 million million.
Look at how much of the borrowing is CROSS BORDER holdings. The world's financial
systems are inextricably entangled. People think the Ukraine conflict is a
conventional war; in my mind it is a financial conflict as Russia holds Hundreds
of BILLIONS of loans from Western Banks as does the Ukraine - one misstep by
the US and it's kerblooey for Euro area banks who are in way too deep. The
IMF loan to Ukraine was rushed into place to prevent this explosion from happening.
Trapped in debt orgies of their own, China and Japan must import inflation
and export deflation to the world. It is "INFLATE or DIE" to keep their debt
piles from imploding. This is the order of the day throughout the world. Europe
particularly is affected by the deflation as capital flows from China and Japan
and lands on the continent. The fun will really start when the flows REVERSE
(back to China and Japan), as they ultimately WILL....
China has decided to try and walk back from the edge of a Minsky moment and
engineer a soft landing while Japan careens headlong into it. The task for
China is enormous as HALF ($15 Trillion, or $15 million million) of the world's
credit creation mentioned previously emanates from the Chinese economy.
Much of the credit creation went into real estate development and lending:
Floor space per capital is now 30 square meters, surpassing the level that
preceded the level in japan just before the property collapse in 1988. Much
of the lending is also threatened by rehypothication as developers have borrowed
from many using the same collateral. So titles are BLURRED!
Looked at more broadly, corporate debt has been the principle destination
for the credit creation and profits have barely budged or declined due to Yuan
appreciation.
Now the property markets are beginning their tumble:
The Chinese have fully anticipated this and have instructed the major banks
to pick up mortgage lending to individuals to cushion the fall. Other measures
to follow in my opinion. They are trying to execute a controlled crash. They
have made a decision to pop the bubble DELIBERATELY, allow defaults to instill
market discipline and remove the moral hazard currently in place. Let's
pray for their success, no other central bank or government dares to walk this
path. They are doing what Von Mises said in an attempt to avoid an extinctions
event.
This is a face of the debt spirals we see throughout the world as developed
world economies' debt compounds ferociously and growth is a distant memory.
The Chinese just did it in the private sector while the developed world have
done it in the public sectors since 2008.
The corporate buildup of Infrastructure - industrial, energy, and state owned
enterprises - is excess capacity that lays idle or underutilized. It is why
the Yuan has suddenly weakened as China must become more globally competitive;
what was a one way train in Yuan appreciation is now probably going to become
a one way train lower to regain export competitiveness and profitability regardless
of US POLITICAL CATERWAULING. The Chinese just need to say, "Do you want us
to buy the treasuries or not?"... and they will privately...
Huge carry trades are in place to capture the appreciation of the YUAN
and have enjoyed a one way bet for years. This is most likely OVER! The
fireworks as these unwind should be full of excitement and BIG LOSSES as
the GLOBAL specs get burned to a crisp. Some of those trades are operating
at 50 or 100 to 1 leverage.
Fortunately, most of these loans DID NOT go for consumption so a good amount
of value is recoverable. Very little of the credit creation is denominated
in foreign currency and what is subject to capital controls, thus China's mostly
closed economy is not threatened by the tide of liquidity and hot money going
out as many other emerging economies are.
Notice how much DEBT is Yuan denominated! Mostly ALL OF IT. The Chinese are
painfully aware of the problem and DETERMINED to address it, trying as hard
as they can to reduce the credit growth rate without triggering an implosion. A
high wire act of historic proportions. They have forcefully dealt with
bank runs by trucking in loads of cash and have used state run media support,
while a financial firefighting team is clearly visible when questions or fears
arise.
Private sector wealth management trust products present the biggest challenges
this year as many of their offerings mature this year presenting big challenges
to avoid a LEHMAN moment to the Chinese banking system. Non-performing loans
are skyrocketing as we can see from this chart from www.zerohedge.com:
Looks formidable, but in doing the math 593 billion Yuan is just $95 billion
dollars, a drop in the bucket for a central government holding $4 trillion
dollars ($4 million million or 4,000 billion) of foreign reserves. They can
take hits 5 times this amount and not blink, and most of it will come from
CTRL PRINT so virtually none is at risk. Although the rolls will be ferocious,
the debt from sectors suffering from overcapacity is manageable. Check out
this graph from GaveKal and 'Over My Shoulder' by John Mauldin:
Will some eggs be broken? Yes, as intended. Fortunately, for depositors, most
of the banks are state-owned and the solution is just as close as the printing
press, which they have no problem deploying. Can you say a bad bank for the
second time in the last 18 years? They will not be allowed to fail...
Contrary to popular belief the cost of money is not as badly priced as most
people believe in China, and contrary to the developed world there is a cost
for money and it is mostly paid in full (another graph from Gavekal and Mauldin):
In conclusion: the Chinese BOOM is over but the bust talk is FAR overdone
in my opinion. Chinese leaders acknowledge the mistake they have made with
the credit bubbles and are determined to walk back from the precipice.
"If everyone in society is trying to get into the financing business,
we may have entered a phase where a fever has started to affect our ability
to think," ... "We must make up our minds to rectify interbank
operations and all kinds of wealth management products." - President
Xi Jinping
They have done a good job in my opinion by cutting credit growth from 35%
year over year at the peak of credit expansion to 12-14 % you today, a monster
reduction already. The clean ups will be messy as financial mishaps occur and
malinvestments fall to their demise, but moral hazard will recede which is
the GOAL. Chinese leaders have repeatedly talked about slower economic growth
and are tightening their grips on credit growth. They are prepared to fight
the fires as they emerge.
The Chinese leaders are also opening capital accounts, beginning interest
and exchange rate liberalization, attacking pollution, reforming state owned
enterprises, banking reform and job creation to name a few. If only the developed
world would tackle their problems which have been unaddressed since the 2008
crisis.
People underestimate the level of BRAINS in the communist party upper echelons;
most were identified at an early age, have been GROOMED since an early age
and have attended the finest schools in the world. They are not the political
ignoramuses you see in the developed world. Do not underestimate their bona
fides or the powers they wield in a one party state to address systemic weaknesses.
Those five and ten year plenums are serious long-term planning as well as political
slugfests, but when they are over everybody has a GAME PLAN.
The anti-corruption campaign and war on political patronage is upsetting a
great deal of apple carts as bribery in the form of red letters is a common
part of doing business in China today. It's all who you know and how much you
pay for success to modern day POLITICAL Mandarins. Now the corporate sector
doesn't know who to pay as they are connected and who not to pay so they don't
get caught in the dragnet. Some are above the law and some are not becoming
subject to it.
Yes, the residential real estate markets have commenced their slides from
bubblicious levels, but the fact remains the buildings are there as is the
recoverable value. Anyone who has been to China (I have and my wife is mainland
Chinese) KNOWS there are plenty of people looking for better places to live
and to move. The Chinese government is not BLIND, they see the ghost cities
and have prepared for it. You can count on it.
Now affordability will loom making the inventory attractive, we are just waiting
for Mother Nature to do her stuff and strong hands to surface, and they will.
I believe they will soon they start broadening the Foreign direct investment
rules to allow more strong hands to enter the country and buy the malinvestments
that were not taken down by domestic vultures. Capital flows will become much
more TWO WAY: IN AND OUT as they increasingly join the international financial
community as they should being the world's second largest economy. Expect them
to exercise their military and financial clout with regularity.
Globally, the slowing China will no longer PULL economies forward as they
have done for almost 5 years. This will put the Fed, BOE and Bank of Japan
back into the HOT SEAT to provide the next round of money printing to FILL
THE GAP. Much of whole world is operating in the function equivalent of insolvency;
the kabuki dance to the destination Von Mises outlines at the beginning of
this letter is unfolding as predicted. I am in no hurry to get there... Are
you?
Everybody UNDERESTIMATES the Chinese (which they love), but in the end the
Chinese will deal with the banking and lending crisis as they have done numerous
times in the last 20 years: THEY WILL PRINT THE MONEY to DEFUSE the crisis
and let the Chinese people take the INFLATIONARY HIT. For the People's Bank
of China and the communist party, money is free. They will print whatever is
necessary and use the media and force to control confidence and fear to the
chagrin of the china bears. They are moving into the modern world as fast as
possible based on the enormous tasks they have embraced. So, no more booms
but probably not a bust.
Don't miss the next edition of TedBits subscriptions are free at CLICK
HERE. We will be covering the deflation in Europe and the insanity gripping
sovereign bond markets.
Author's Note: In my opinion the greatest manmade disaster and
OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified
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unfolds economically? Hedging the printing presses impact on your paper money?
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