Using Veritas to Construct the "Per…

29-04-2017 Hits:49038 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:49383 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:48702 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:50573 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:50002 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:52564 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:33666 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:51221 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:51113 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:51422 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:53856 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:52879 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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Today in the news: China Inflation, Production Accelerate, Adding Pressure for Stimulus Exit

March 11 (Bloomberg) -- China’s inflation reached a 16- month high, industrial output climbed and new loans exceeded forecasts, adding to the case for the government to pare back stimulus measures.

Consumer prices rose 2.7 percent in February from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the 2.5 percent median estimate of 29 economists surveyed by Bloomberg News. Seasonal factors stemming from a weeklong holiday may have boosted prices. Production rose 20.7 percent in the first two months of 2010, the most in more than five years.

Contrary to many, not only do I believe China is in the throws of a credit driven asset bubble, but its touted safeguards point the way to drastic correction.

China huge foreign reserves: Not a savior for the country if the asset bubble bursts

The concerns highlighted by Michael Pettis (a professor at Peking University's Guanghua School of Management,  "Never short a country with $2 trillion in reserves?") are telling, particularly that huge foreign exchange reserves are not a sure shot solution for preventing China from a future financial crisis. I would like to amplify the message contained therein, since the news coming out of China reinforces the fact that it is really not "different this time" so emphatically.

The Author states:

 "...Let us leave aside that the PBoC's reported reserves are a lot more than $2 trillion, and that if correctly accounted they would be pretty close to $3 trillion.  China's foreign reserves are certainly huge. They add up to an amount equal to about 5-6 % of global gross domestic product.

But they are not unprecedented. Twice before in history a country has, under similar circumstances, run up foreign reserves of the same magnitude.

The first time occurred in the late 1920s when, after a decade of record-beating trade and capital account surpluses, the United States had accumulated what John Maynard Keynes worriedly described as "all the bullion in the world". At the time, total reserves accumulated by the US were more than 5-6% of global GDP...

The second time occurred in the late 1980s, when it was Japan's turn to combine huge trade surpluses, along with more moderate surpluses on the capital account, to accumulate a stockpile of foreign reserves only a little less than the equivalent of 5-6% of global GDP.   By the late 1980s, Japan's accumulation of reserves drew the sort of same breathless description - much of it incorrect, of course - that China's does today.

Needless to say, and in sharp rebuttal to Friedman, both previous cases turned out badly for long investors and brilliantly for anyone dumb enough to have gone short. During the early years of the Great Depression of the 1930s, US stock markets lost more than 80 per cent of their value, real estate prices collapsed, and the US economy contracted in real terms by an astonishing 30-40 per cent before recovering in the 1940s.

Japan's subsequent experience was economically less violent in the short term, but even costlier over the long term. During the period following its astonishing accumulation of central bank reserves, its stock market also lost more than 80 per cent of its value, real estate prices collapsed, and economic growth was virtually non-existent for two decades.

Reserves of course are not useless as an enhancer of financial stability, but their use is for very specific forms of instability.  Having large amounts of reserves relative to external claims protects countries from external debt crises and from currency crises."

The key term here is "external". China does not face an external debt concerns, as the country's foreign claim as per BIS (Bank for International Settlement) stood at only $278.6 billion at the end of September 2009 (which is only 5.3% of the country's 2010 expected GDP as per IMF). However, China's domestic debt currently remains at an uncomforting level (as we will see in our discussion below)

"The risks that China faces today (and the US in the late 1920s and Japan in the late 1980s) is of excessive domestic liquidity having fueled asset and capacity bubbles, the latter requiring the uninterrupted ability of foreign countries to absorb via large and growing trade deficits.  These risks include an explosion in domestic government debt directly and contingently through the banking system... "

This risk is visible in the recent finance ministry announcement to nullify all guarantees local governments for loans taken by their financing vehicles, and its plan to issue rules banning all future guarantees by local governments.

If local government debt that China's local governments have been raising through off-balance sheet (and similar) investment vehicles to circumvent direct borrowing regulations -  and which is not counted in official calculations, is included in the total debt - then the country's debt could rise to 39.838 trillion Yuan or $5.8 trillion. This puts China in similar debt standing with many of the PIIGS, being that its accounting for 96% of GDP, much higher in comparison to the IMF's estimate of 22% which excludes local-government liabilities, in 2010 based upon research by Northwestern University's Professor Victor Shih, who estimates China's local- government outstanding debt at the end of 2009 at 11.429 trillion Yuan.  

This puts China 4th in line, behind Italy, Belgium and Greece in terms of gross debt to GDP!

"... And reserves are almost totally useless in protecting these economies from the risks they face (and, no, no, no, reserves cannot be used to recapitalize the banks - only domestic government borrowing or direct or hidden taxes on the household sector can be used to recapitalize the banks). In fact, it was the very process of generating massive reserves that created the risks which subsequently devastated the US and Japan. Both countries had accumulated reserves over a decade during which they experienced sharply undervalued currencies, rapid urbanization, and rapid growth in worker productivity (sound familiar?). These three factors led to large and rising trade surpluses which, when combined with capital inflows seeking advantage of the rapid economic growth, forced a too-quick expansion of domestic money and credit."

The above case is most accurate  in regards to China, where the accumulated reserves have come from preventing Yuan appreciation, rapid urbanization and rising worker productivity (which remains one of the key drivers for the country's exports). Thus, if we go by historical precedence, a huge financial reserve for China does not safeguard the country against a financial crisis.

These similar concerns are being supported by other analysts and economists. Trend forecaster Gerald Celente believes that the depression is global and a contraction across the entire planet cannot be avoided, and that includes China.

Economist Harry Dent holds a similar view, recently saying that, "China will see their bubble collapse strongly when the U.S.-led stimulus program fails due to rising defaults and foreclosures later in 2010, at the same time that the world is looking for China to pull it out of this global downturn."

As suggested above by Michael Pettis, though foreign reserves can be used for very specific forms of instability, there is one way in which China can use its reserves to tackle the current problem of rising domestic debt, that is by converting its foreign currency denominated assets (which is primarily dollar for China) to Yuan.

However, this would lead to appreciation of Yuan against the USD. With China being an export-driven economy, this is a measure of very last resort. 

But eventually, China will have to appreciate Yuan as it is facing considerable international pressure from its trading partners, more importantly, it looks like the only way to ease strains on the country's fast growing economy. We feel that this will not be a voluntary move (China faces new pressure to let currency rise).

 

Subscribers should reference the following related topics/documents: