Last week I posted a comprehensive piece, The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess. The goal was to outline the literal mess that those who decided to drag us through this “Great Global Macro Experiment”have left us in. Since then, in merely one week's time, we have bore witness to:

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My stance on China's comeuppance for attempting to pack 50 years of growth in to 3 years is still quite unchanged. I am fully aware that many "smart" bankers and analysts have different perspectives, but as I posted a couple of weeks ago, "Currency Crisis! Inflation! Sovereign Defaults! Bahhhh… Who Are ‘Ya Gonna Believe, The Government Or Your Lyin’ Eyes?". From Bloomberg, this morning: U.S. Index Futures Fall After China Raises Banks’ Reserve Ratio

China’s central bank raised reserve requirements for lenders for the second time this year to counter inflation and curb property-price gains.

...Reserve ratios will increase half a percentage point starting Feb. 24, the People’s Bank of China said on its website today in a one-sentence statement. Today’s move came 10 days after China raised interest rates.

And anecdotally on the ground as reported by BoomBustBlogger John:

We import from Asia, V-nam mostly. After Chinese new year factories returned back to:

    1. 8% devalution in the dong
    2. New Taxes for using moterbikes and cars
    3. Interest on loans from 14 to a new 20%
    4. and more prices controls.

On top of that the real kicker. Business in Vnam had to buy US$ from the black market, the diff was 30% compared to the banks. Business would buy on the black market and get a fake bank reciept at the banks rate and keep the 30% spread & use the fake reciept for accounting, this helped keep their prices down. Now the gov is matching the black, the spread is gone.

We have people on the ground in Vnam. So who is going to pay these new prices that are coming over here right now, higher prices are on their way. Can you say margin compression, possible a big one. Look for shorts in low margin retail, big ticket item retail that are heavy into made in Asia not made in USA.

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This is my response to an inciteful insightful comment posted by GJK313. It is in reference to an article which readers can find here, titled "FASB Surrenders - America Win". I suggest readers read the aforelinked document in its entirety before moving on. Notice how this is written by economists and analysts, not real world investors that are investing THEIR OWN CAPITAL! When I state "own capital" I mean their money, and not that of their clients. I cannot fathom how anyone who had their own money at stake would ever want more ambiguity in pricing assets, in lieu of less.. Let me pick this apart...

"Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place"
Well, when the market is illiquid, the assets in said market have a lower market value. It really is that simple.
"Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place"
Yes, because if said banks had to liquidate their loans the only place to liquidate them would be said "illiquid" market. This goes to show you how the value of the loans are probably highly overstated by those such as the authors of this article. Guarantee me that no bank will ever go bust again - guarantee me that no bank will never, ever need to sell assets, and I will soften my stance some on mark to market accounting. Until then...
"banks will be allowed to carry loans on their books at amortized cost, reflecting cash flow (payments), as well as reasonable estimates of likely loan losses."
This should now mean that the price of all unsecured loans should drop immediately and dramatically for all consumers, for FASB and these authors are not differentiating between loans backed by collateral and loans not backed by collateral. Many formerly overcollateralized real estate loans are now partially or fully unsecured due to the collapse of real estate "Values" and "Prices" (yes, there is a difference). They are also not taking into consideration the financial and strategic advantages of defaulting on a loan against an asset with negative equity. So, if the banks can now benefit from pricing loans at will (as the authors stated, "reasonable estimates of likely loan losses" - who will make these estimates?), regardless of collateral, why shouldn't that benefit be passed onto the consumer and allow them to enjoy said valuation/pricing perks. Picture me going to a bank and saying, "Just loan me $4 million with nothing hard to back it for no more than you charge that guy with a 40% overcollateralized loan. You can't charge me more since I will keep my payments current and you will be able to make a "reasonable estimate" of the losses, of which of course there will be none because.... Well, just because!"
Does this scenario make any sense to you?
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In response to the post "Japanese Downgrade Illustrates Potential Paths To Contagion", several readers have suggested that the Pan-European sovereign debt issue may be overblown since Japan has been moving along for over 20 years and its debt to GDP is twice that of my of the troubled EU nations. I want to shed a little light on this topic. To begin with, it is not so much the aggregate debt-to-GDP levels that should cause alarm, but the delta of said levels (to be discussed in my next post on the topic). Even when looking at the aggregate debt/GDP levels, one must take a look at the actual debt in question.

Public Debt-to-GDP

Japan, Greece, Italy, Belgium, Ireland, and Canada have some of the largest public sector debt in relation to GDP. Japan, Greece and Italy have public sector debt-to-GDP topping over 100% versus 68% for Euro zone and 31% and 27% for Asia and Emerging markets, respectively.

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I have not had a chance to revisit my China thesis in a while, but it is coming once I round off the European recap and finish up my US technology thesis. China will most likely play a key portion in global financial and economic contagion that is simmering over in Europe. A commenter on another popular blog had this to say of my most recent post regarding Ireland (Erin Gone Broken Bank: The 2nd EMU Nation That Didn’t Need a Bailout Get’s Bailed Out Within Months, Next Up???):

Mr. Middleton,

Although I have no connection with financial investing or services, I read your analyses, and those of others, to be informed of events and topics of great economic importance.  What strikes me as odd, is that in all the stories on European Contagion I find no mention of China's position.  Given China's significant economic connection via trade with the European Union, it is puzzling we don't see more overt action from China to protect/affect the health of it's export recipient's economies.  Am I to infer there is covert action (via GS, Central Banks, IMF for example), China is simply not concerned about the economic stability of the European Union, or it's just waiting for the appropriate time for action/influence?

We definitely know where China stands on U.S. trade and Fed's policies, and it's relations with the other BRIC countries.

Is there a story here that I've missed?

I replied:

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Now that the Robo-Signing scandals have achieved full notoriety through the media, it is time to address the real issues facing investors in bank stocks. We also believe that the media is staring at the wrong target. Each major media outlet is copying what is popular or what the next outlet broke as a story versus where the true economic risks actually lie - which is essentially the real story and where the meat actually is. This is what is truly at stake - the United States is now at risk of losing its hegemony of the financial capital of the world! Why? Because when we had the chance to put the injured banks to sleep and redirect resources to into new productivity, we instead allowed politics to shovel tax payer capital into zombie institutions as they turned around and paid it right back out as bonuses. As a result, significant capital has been destroyed, the original problem has metastized, and the banks are still in zombie status, but with share prices that are multiples of the actual values of the entities that they allegedly represent - a perfect storm for a market crash that will make 2008 look like a bull rally! For those who feel I am being sensationalist, I refer you to my track record in making such claims.

The Japanese tried to hide massive NPAs in its banking system after a credit fueled bubble burst by sweeping them under a rug for political reasons. Here's a newsflash - it didn't work, it hasn't worked for 20 years, and despite that Japan is embarking on QE v3.3 because it simply doesn't believe that it is not working. Here are the steps the US is consciously taking it its bid to enter a 20 year deflationary spiral like Japan, and may I add that these steps were clearly delineated on BoomBustBlog ONE YEAR ago (Bad CRE, Rotten Home Loans, and the End of US Banking Prominence? Thursday, November 12th, 2009), so no one can say this is a surprise.

Step one: Hide the Truth!

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Quick Asian and European Recap, taking it in baby steps...

  1. Reggie Middleton warns that the UK prospects for recovery are dramatically over-hyped and optimistic (March 2010): See
  2. Bank of England warns UK recovery will be weaker than hoped (Telegraph)
  3. Bank of England Cuts Growth Outlook, Sees Inflation Undershoot (Bloomberg)

The non-sense that passes as the financial reporting from these sovereign entities should be ridiculed. I’d like to take this time to share page 4 of our subscription-based analysis of the UK’s predicament (subscribers, see File Icon UK Public Finances March 2010)…

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About a week and a half ago I released a refresh of the HSBC Foensnic Analysis along with a macro rant on why China will not pull the world out of an economic slump in "Will the Emerging Markets Lead the World to New Growth?". HSBC is an interesting bank to cover since it has its hands in so many emerging markets as well as developed nations. In a nutshell, I truly don't believe a net export nation can lead a highly indebted developed world to economic nirvana when that indebted world is in the process of buying less (in terms of imports, and practically everything else) as well as paring down reliance on leverage as they wrestle with depreciating assets.

Well, this week, reality hit and the MSM news headlines say: China Says Exports Outlook 'Grim' on Europe Demand

China sounded a gloomy note on Tuesday about its export prospects, warning in particular that belt-tightening by deeply indebted European Union governments would dampen demand for the country's goods.

Calling the trade picture "still complicated and grim", the Ministry of Commerce said high growth in exports in the first half would give way to slow growth in the second half.

"The sovereign debt crisis has made many EU countries shift to fiscal austerity from fiscal expansion, which will greatly restrict consumption and investment growth in the EU," the ministry's spokesman, Yao Jian, told a news conference.

There is a great, big, 50+ article, "I told ya so!" to be had here. Reference "the Coming Pan-European Sovereign Debt Crisis" - and be aware that this malaise is guaranteed to spread. See the Sovereign Contagion model below for more on this...

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Just after the HSBC Emerging Markets Index was released showing a marked slowdown in growth, HSBC Chief Economist Stephen King told CNBC news that Emerging Markets Hit a Bump in the Road. The is to be expected, with monetary tightening occurring in China (see and ), austerity measures being applied en masse in developed Europe (see The Pan-European Sovereign Debt Crisis) and the potential for a double dip in the US and UK. He also says that there is promise for the future, and I might even be inclined to agree with him, it's just that we need to get past the present first.

HSBC has a proprietary interest in the success of the emerging markets for they are highly geared into their growth and well being. With the developed nations of the west and Europe choking on debt overhang, the emerging markets are HSBC's key to growth, so it is very much the case that Mr. King is talking his book - which is not necessarily a bad thing, we just need to know all of the facts as they are laid before us.

I have just released our HSBC forensic analysis for the second quarter, and it is easily one of the most meaty reports that we have accomplished this year with 26 pages (Pro/Institutional versions) of fundamental, economic and macro analysis that truly picks apart both the inner workings and the future prospects of this bank. Below are some excerpts as applies to the topic of the emerging markets...

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Enjoy! Feel free to leave comments on the videos.

02:18

Robert Shiller suspects Australia is in a housing Bubble

10:00

In Australia, Tax as a Contagion

Australia: The Land Down Under(water in mortgage debt

As an extension of the Chinese macroeconomic discussion at BoomBustBlog throughout 2010, there may be an “Asian Contagion” spreading as a result of a Chinese investment slowdown.  Those at risk are the countries and regions that have supplied China with the commodities necessary to build empty cities.  While the (comparatively, in terms of GDP) enormous Chinese stimulus package from the first part of the financial meltdown in 2008 has generated incredible growth in GDP and asset prices, the game appears to be over for flipping 1000 square foot apartments in Shanghai.  After the direct hit taken to China, the picture looks very grim for Australia, where a bursting Chinese housing bubble could drive industrial commodities lower, sparking higher unemployment in one of the nation’s largest sectors, and in turn pop their domestic housing and property bubble.  In the near to medium term, Australia is showing some major red flags.

Australian property bubble, wikipedia


Australia: The Land Down Under(water in mortgage debt), pt. Deux: Which Banks to Short?

We looked into the four largest Australian banks – Australia and New Zealand banking Group Limited, Commonwealth bank of Australia, National Australia Bank Limited, Westpac Banking Corporation. All the banks, except Commonwealth bank of Australia, have ADR.

The banks are trading at very high multiples when compared with their US counterparts. The current average price-to-tangible book value of the four Australian banks is 2.5x against the current multiples of less than 1.5x for US banks. The Australian banks are enjoying a premium largely owing to lower charge-off rates, delinquency levels and the NPL levels than their US counterparts. While the housing loans account for a substantial portion of the total portfolio of Australian banks, the housing bubble in Australia is yet to burst to result in defaults in this sector. Also, the Australian banks have additional shelter from two factors:

  • The housing loans in Australia are recourse loans (borrowers are personally liable to pay even after foreclosure)
  • The loans given in excess of LTV (Loan-to-value) of 80% have Lender Mortgage Insurance which covers the losses of the lending bank

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