"One is the issue of inflation. China releases its monthly inflation data before the end of the month, and that does raise a bit of skepticism there," he said, pointing out also that although the country reports car sales rises in the double digits, gasoline sales increase by only 2 to 3 percent. Hey buddy, haven't you heard that cars are getting more and more efficient these days. Did you fail to consider the possibility of 2 million Prius's being sold to the Chinese??? Huh! :-)
O'Neill said fears of asset bubbles in China because of the country's rapid growth and lax fiscal and monetary conditions are "completely overblown." He also pointed out that the Chinese stock market has not made a new high since August. I'm at a loss as to how anyone can fail to consider the potential for a real estate asset bubble in China. Maybe I'm just paranoid...
The Tiananmen Square protests of 1989, referred to in most of the world as the Tiananmen Square massacre and in the People's Republic of China (PRC) as the June Fourth Incident (officially to avoid confusion with two prior Tiananmen Square protests), were a series of demonstrations in and near Tiananmen Square in Beijing in the PRC beginning on 14 April 1989. Led mainly by students and intellectuals, the protests occurred in a year that saw the collapse of a number of communist governments around the world.
For all of those who feel China is going to take over the free world, just remember that when you blow a bubble (particularly a balance sheet bubble) it is bound to pop. The damage from the pop invariably does more harm than the boost from the bubble. It has always been the case, particularly when leverage is involved - which makes the impact that much more devastating. If anybody can attest to this, it should be us Americans (British, Spanish, Irish, those from Dubai, Japanese...).
Methinks that before China gets a chance to become a preeminent world power, their profusely blown asset bubble (by way of a most accomadating fiscal policy) will blow up in their face and they will go through what the US, Japan and UK just (is still) went through, exacerbated by the fact that they are still a net export reliant economy when the bubble blowing is removed. With the developed world in sluggish mode, they will have very little to fall back on as their asset prices collapse to equilibrium and debt from their steriodal lending system is left under or uncollateralized and unable to be serviced.
Why does everybody confuse bubbles with economic progress?
First, a quick news scan:
- Dubai Debt Delays Revive Fear of Financial Crisis
- US Markets Bracing for Selloff on Dubai Debt Worries
- Stocks Fall as Treasuries, Yen, Swaps Rise on Dubai Attempt to Delay Debt
- Yen Strengthens to 14-Year High, Prompting Speculation Japan to Intervene
- Fujii Says Japan May Contact U.S., Europe After Yen's Jump to 14-Year High
- Abu Dhabi Commercial Bank Is Said to Be Owed $1.9 Billion by Dubai World
- Treasuries Jump on Demand for Safer Assets After Dubai Asks to Delay Debt
- Sony, Toyota, Japanese Exporters Brace for `Breaking Point' as Yen Surges
- Japan's Hirano Says Rapid Currency Moves Are `Undesirable' as Yen Rallies (you betcha, reference the JPM links which highlight interest rate and currency exposure for JPM below)
My regular readers should remember my warnings on the currency trade risks (Japan's Hirano can testify), and interest rate derivative concentrations (let's see what happens to the counterparty daisy chain if Dubai defaults): "The Next Step in the Bank Implosion Cycle???". As excerpted:
Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.
Click to expand!
It's bound to happen if regulators don't stop playing hide the sausage and don't start forcing banks to take their medicine. First, a quick recap of the nonsense currently taking place. This post is designed to convince banks that they are considerably better off taking their medicine now than going on with the government endorsed plan of pretending your not sick and risking major surgery, plus chemo and radiation just a year or two later. My next post will be a selection of REITs that didn't make my shortlist, followed by a new REIT report for subscribers that will explicitly show property values of each and every property in said REITs portfolio (and potentially the lender or CMBS/mortgagee pool collateralized by said properties - that's right, someone may be called out).
After dealing with European banks during my work with GGP, I have come to the conclusion that most regional, community and even global banks have no where near the capacity and/or expertise to properly evaluate and value the projects/assets that they have invested in. Well, if that is the case, this is your chance to rectify that problem - on the cheap, at least on a relative basis. So if you are in an appropriate position in your bank, fund or lender - read this evidence that supports the proactive behavior of snatching the big crumbs off the table before there is a mad dash for the micro-specs of bread that may or may not be left if one were to wait it out while playing "hide the sausage games". I'll give you the tools to make a convincing argument, trust me. Here is the broader macro argument for lenders pulling bad debt from under the REIT and CRE industry, thus supporting a bearish thesis for said players.
First: A picture is worth a thousand words...
Instance asset gains and market value stemming from just a small tweak of truth. Financial stocks fly, moving farther and farther from their fundamental values.
Second: We have the obvious manipulation that is occurring in the REIT space (see Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!). Zerohedge speculates "Is Goldman Preparing To Upgrade The REIT Sector?"
Third: We have government complicity in the purposeful opacity of the values of the mortgage assets (see the FDIC "Prudent Commercial Real Estate Loan Workouts" guidance issued Oct 30th, as reported by the WSJ: Banks Hasten to Adopt New Loan Rules and the new FDIC guidance that states performing loans "made to creditworthy borrowers" will not require write downs "solely because the value of the underlying collateral declined").
Fouth: We have a false sense of security that nearly everybody believes should make us insecure, yet somehow we have those long in the markets feelng warm and fuzzy. See You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?.
Now, for those of you who believe that the government's "pretend and extend" policy has any chance in hell of working, or better yet, that we are not following in the footsteps of Japan, let's take a pictorial trip through recent history. There are nearly no Japanese banks in the top 20 bank category on global basis by 2003 - NONE (save potentially Nomura, which arguably survived in name, alone). As you can see, they literally dominated 90% of the space in 1990!
Click to enlarge...
Source: Cap Gemini Banking M&A
I want the banks that read my upcoming real estate analysis to take heed to history. It truly does tend to repeat itself. If you are an officer in a bank with CRE exposure, reach out to me from your work email and I will supply you with an abbreviated copy of one of the recent reports, gratis. This should whet your appetite to subscribe for more.
Well, are we following the Japanese "Lost Path". Notwithstanding the damning evidence of hide the truth and hide amongst lies linked to above, ponder the following rather dated, but still quite poignant data...
We are already back in a bubble, literally months after popping the last one...
- China is using stimulus steriods to pump up manufacturing through lending, literally recreating the bubble that brought down the west, thier major trading partners. Bank asset and loan quality, corporate balance sheet stabiity and real asset valuations are bound to suffer as a result. The question is when will it be apparent. The Chinese government was never known for its freedom of speech and transparency policies.
- The US equity markets are out of control, rebounding from a slump that was caused by problems that still exist. Yes, the goverment headed off calamity by laxing many of the symptoms, but the root causes are still embedded in banks' balance sheets. See FASB tries to close Pandora's box for ideas of what my happen next or see "The Great Global Macro Experiment, Revisited" for why this cycle (in bullets one and two, here) must go on and on despite everyone knowing the inevitable conclusion.
In today's headlines:
Swiss Banks Shun American Customers as U.S. Widens Search for Tax Evaders - how can you blame them, after all: UBS to Pay Up to $4.6 Billion to Close US Tax Probe.
China, Brazil Working on Trade Currency Arrangements and China Allows Trade Settlement in Yuan in Hong Kong although we pretty much all agree that there is no practical replacement for the dollar as a reserve currency, and China even admits it: Dollar Rises as China Rules Out Currency Change; Stocks Rebound
I noticed that no one commented on the last set of treasury tables in Part 3 of my take on investing for inflation. I expect a potential crash in Treasuries. For one, they have been doing too well for too long in terms of very low yield; number two: there is the risk, although relatively minimal as compared to factors one and three,that demand will drop precipituosly, and number three: supply is about to shoot through the roof, at the same time that absolute credit quality will probably deteriorate significantly, alhtough on a relative basis I believe we will be one of the strongest credit risks around. That is not saying much since much of the world is currently in or will be in the toilet.
Many have commented on the demand from China. I have a healthy skepticism of China's output numbers. For one, they are a net export nation with their trade partners ALL in recession. Duhh...
Without their consumer consumption jumping much higher, I don't see
- BoE Set to Boost Money Supply as Rates Near Zero
- Bank of England Cuts Rate to Record Low 0.5%, Will Buy $105 Billion Assets
- Euro Interest Rate To Be Slashed to Record Low
- China Silent on Stimulus, Keeps 8% Growth Target
- GM Says Auditors Doubt Its Going Concern Ability - General Motors says its auditors have raised substantial doubt about the company's ability to continue operations. (BIG BAILOUT)
- General Electric Treated Like `Leper' as Investors Push Down Shares, Bonds
- JPMorgan, Wells Fargo, Bank America Face Ratings Downgrades, Moody's Says
- U.S. Auto Suppliers Said to Discuss Priorities for Aid in Federal Rescue
- Weak Capex May Push Japan into Deeper Contraction
- New Mortgage Plan: Who Qualifies and How It Works
You already know what's happening in the US vis-a-vis quantitative easing, the bubblistic way...
Reread the description of my investment style (see "The Great Global Macro Experiment, Revisited") and why this site is called BoomBustBlog! We are in for one hell of a ride. Subscribers are suggested to hold on to their dentures!
Now that the world agrees with me on China...
China’s economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.
Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News.
Plummeting Chinese demand for parts and materials for exports is reverberating across Asia and the Pacific, driving Taiwan, South Korea and Australia closer to recessions and worsening Japan’s slump. Premier Wen Jiabao said this week that the government must work urgently this quarter to reverse the slowdown and maintain social stability amid a “very grim” outlook for jobs.
Even more gloomy from my man, Nouriel: The Chinese Devil Wears Prada: Why 0% Growth is the New Size 6.8%
The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the U.S. and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.
When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.
Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.
Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9% in y-o-y basis; the Chinese PMI has been below 50 and close to 40 for five months now.
And with manufacturing being about 40% of GDP , manufacturing is certainly in a sharp recession (negative growth) and the overall economy may be close to a recession
So the 6.8% growth was actually a 0% growth – or possibly negative growth – in Q4; and the Q1 figures look even worse. So China is in a recession regardless of what the highly massaged official numbers claim.
.. and another "I told you so" about 5 months ago when the sell side analysts and MSM world was clamoring for China and India to save the world, if you can only save the cheerleader (Heroes quip). From yours truly...
China Macro Update (a one percent drop in the US growth rate will effectively slow down China’s growth by 1.3 percent.)
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)China: An Insight into its Past Growth and the Future (also of interest is the HSBC opinion and 2H08 update) China’s massive growth in the last decade has taken the world by surprise. CurrTuesday, 19 August 2008This is one of the reasons why we are up over 500% on HSBC, with the trade capable for an additional 200% more. See:
Part one of three of my opinion of HSBC and the macro factors affecting it
(Reggie Middleton's Boom Bust Blog/MyBlog)HSBC Holdings, one of the largest global banks, has remained relatively unaffected by the ongoing credit turmoil and housing downturn in the US until now. The bank has outperformed its peers, mostThursday, 14 August 2008
HSBC 1H 08 results update
(Archived/Reggie Middleton's Boom Bust Blog/MyBlog)Decline in net income HSBC’s net income fell 29% y-o-y to US$7.72 billion (or US$0.65 per share) in 1H 08 from US$10.9 billion (or US$0.94 per share). The bank’s profThursday, 14 August 2008