Reggie Middleton's BoomBustBlog - Reggie Middleton's BoomBustBlog - Displaying items by tag: Asia http://boombustblog.com Tue, 23 May 2017 10:32:26 -0400 en-gb Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers http://boombustblog.com/blog/item/6233-smartphone-hardware-manufacturers-are-dead-long-live-the-google-like-solution-providers http://boombustblog.com/blog/item/6233-smartphone-hardware-manufacturers-are-dead-long-live-the-google-like-solution-providers

Two and a half years ago I declared in my mobile computing wars series that Google would commoditized the mobile computing space, thereby turning the industry on its head dramatically changing business models and margin outlooks. Curiously enough, despite rampant evidence that I've been nothing but correct, investors, pundits and even leading industry participants still don't get it. CNBC ran the following article this morning... Chinese Smartphone Users Snub Apple for Local Brands

Sales of smartphones in China are outpacing sales in the U.S., and yet many Chinese shoppers are choosing cheaper, local brands, which now have more than 50 percent market share. The Financial Times reports.

What CNBC failed to realize was that the primary beneficiary of all of this is Google, who benefits from volume in handset and tablet sales, not margin. I made this point clear in my paid research reports, free blog posts and multiple interviews - to wit:

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Google's "less than free" business model has successfully put it on track to becoming the next Microsoft. Once it has 90+% market share in mobile OSs (it's currently knocking on 89%'s door), it will have the door opened to lead as the de facto provider of cloud services, basically acting as the Windows operating system (remember the importance of this OS in the 1990s) of the Web. We're not even broaching the topic of Google being the shepherd of global data and information throughout the web and the Internet connected world!

Let's face it, Smartphone Hardware Manufacturers Are Dead, Long Live The Google-like Solution Providers! 

For those who disbelieve this statement, remember, there are no such things as cheap Chinese knockoffs anymore. It's all made in China, at least from a hardware perspective. The only thing that wasn't outsourced to Cheap Chinese Labor (CCL, but soon to be known as iCCL - inflation dinged not so cheap anymore Chinese Labor) was the IP and tech behind the OS and software. Here, Google easily reigns supreme, with its only viable competitors being Microsoft Windows Phone 8/RT/Pro and Apple's iOS6. Apple is nearly out of the picture, its just that the Hoi Polloi haven't received the memo yet (as was the case with our view of RIMM 2 1/2 years ago, and you see how that ended). Microsoft is simply an OTM call option with a decent amount of time premium still on it.

chinese wholesale android

Here you have a device available right now for just $160 retail, even less wholesale, unsubsidized. It actually blows the spec pants off of the iPhone 4S and keeps the iPhone 5 in the conversation! For the record, the iPhone 5 retails for $650 to $850 dollars!

phone1phone2phone3

Potentially profitable and disruptive? Ask the classified and newspaper industries (or at least what’s left of them) if Google knows what it’s doing!!!!

As excerpted from our nearly 70 page forensic Google report (Subscribers, see Google Final Report 10/08/2010), I attempt to educate on the investment prowess of Google (that is both internal investment and external acquisition). Remember, many of Google's investments have become the largest instances of their type in the indsutry. The largest web video presence: YouTube! The largest mobile OS? Android! The largest mobile ad presence? Admob! the largest online productivity suite? Docs/Drive! I can go on with Gmail, Voice, etc., but if I haven't driven the message home yet then I probably never will. Google management has made it clear that YouTube will compete with major networks and Google Docs will compete and is actually pulling some business from Microsoft Office in the Enterprise. These are mere anecdotal examples. We all know the Android story already...

Google Final Report Sep 29 Page 49Google Final Report Sep 29 Page 49

Google Final Report Sep 29 Page 50Google Final Report Sep 29 Page 50

Google Final Report Sep 29 Page 51Google Final Report Sep 29 Page 51 

Google Final Report Sep 29 Page 52Google Final Report Sep 29 Page 52

Google Final Report Sep 29 Page 53Google Final Report Sep 29 Page 53

Google Final Report Sep 29 Page 54Google Final Report Sep 29 Page 54

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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reggie@youcanreachmeatthisemail.com (Reggie Middleton) BoomBustBlog Thu, 29 Nov 2012 06:28:18 -0500
BoomBustBlog's Armageddon Puts Become Fashionable At Goldman http://boombustblog.com/blog/item/6105-boombustblogs-armageddon-puts-become-fashionable-at-goldman http://boombustblog.com/blog/item/6105-boombustblogs-armageddon-puts-become-fashionable-at-goldman

Goldman's strategy desk just came out with a recommendation that mirrors my guidance to subscribers, a 3 weeks later, reference Armageddon Puts Versus Truly Busted CRE REITS: Looking for that 5x-10x ROI 

Yesterday, I received a couple of emails along the lines of the one displayed below...

"Hi Reggie,

Can you please put out any guidance on your Armageddon Puts for your lowly retail subscribers?

Thanks"

Well, I would like all to know that I'm not a typical mo-mo type trader. I'm a strategist. With that being said, I'm also not the one to look a strong risk/reward proposition in the face and do nothing. Below is a set of charts that should drive the mindset home.

 

SPX_puts

 

The actual chart with the series and strike of the puts can be found in the retail investor's discussion forum. I will also be available to chat there as well.

If one would have averaged small OTM put purchases with with ample time value attached over the last week and a half, one would have amassed a neet little collection of Armageddon puts that will start popping into the money today. They were cheap enough to throw away in the rallying market, and if things go awry (quite likely) three digit returns are virtually guaranteed. The following is Goldman's note from this morning...

Published 10:46 AM Thu Jun 21 2012 ________________________________

Noah Weisberger

Aleksandar Timcenko

We are recommending a short position in the S&P 500 index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390. This morning, the Philly Fed print of -16.6, down sequentially and worse than expected, provides further evidence that weakness has extended into June. Although yesterday's FOMC delivered easing as expected, with a dovish statement, positive risk sentiment ahead of the FOMC had already buoyed markets. And we now think, with incremental US monetary policy on hold, the market will need to confront a deteriorating growth picture near term. The risk to our recommendation is that the data soon reverts to the 2-percent growth path our economists expect, that China growth turns, or that European policy-makers' rhetoric buoys risk sentiment further from here, with the upcoming end-of-June summit a focal point on this count.

The MSM headline barrage continues to confirm my multiple warnings on the increasingly ugly macro situation both here and abroad...

This is how the European banks were killed in the first place -  Dead Bank Deja Vu? How The Sovereigns Killed Their Banks & Why Nobody Realizes They're Dead. The ECB will become the world's largest insolvent hedge fund (sans the hedges, of course) if it is not so already...  .

More MSM headlines to drive the point home

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reggie@youcanreachmeatthisemail.com (Reggie Middleton) BoomBustBlog Thu, 21 Jun 2012 12:35:12 -0400
Armageddon Puts Versus Truly Busted CRE REITS: Looking for that 5x-10x ROI http://boombustblog.com/blog/item/6093-armageddon-puts-versus-truly-busted-cre-reits-looking-for-that-5x-10x-roi http://boombustblog.com/blog/item/6093-armageddon-puts-versus-truly-busted-cre-reits-looking-for-that-5x-10x-roi

Yesterday, I received a couple of emails along the lines of the one displayed below...

"Hi Reggie,

Can you please put out any guidance on your Armageddon Puts for your lowly retail subscribers?

Thanks"

Well, I would like all to know that I'm not a typical mo-mo type trader. I'm a strategist. With that being said, I'm also not the one to look a strong risk/reward proposition in the face and do nothing. Below is a set of charts that should drive the mindset home.

SPX_puts

The actual chart with the series and strike of the puts can be found in the retail investor's discussion forum. I will also be available to chat there as well.

The REIT analysis referred to in the chart can be found here for subscribers (the property by property valuations are for Professional/Institutional subscribers only):

I have just revisited the performance of this company (last update was at least a quarter ago). If my paid subscribers recall, we valued the company at rougly 10% of its current market price (see File Icon Cashflows and Debt Preliminary Analysis), with a variety of scenarios to be played out that may affect said valuation. This was based on valuation of key properties of the company, which together accounted 78% of the total portfolio in value terms.

Since then the company has released its full year 2012 results and 1Q2012 quarterly performance. There is no visible improvement in the performance of the company. The company is struggling to handle massive leverage, industry average defying LTVs, proportionately large debt liabilities coming due - the bulk of which is expected to face the music sometime in 2012 in view of upcoming liabilities of over nearly $700 million during the remainder of the year.

In recent times the company has used revolving credit facilities to fund debt repayments.It looks unlikely it will be able to do so this time around. Below is the depiction of projected cash shortfall in 2012...

Subscribers can download this full update from the next post, to be published within 24 hours...

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reggie@youcanreachmeatthisemail.com (Reggie Middleton) BoomBustBlog Fri, 08 Jun 2012 07:54:55 -0400
A Quick Note On China's Rate Cut http://boombustblog.com/blog/item/6092-a-quick-note-on-chinas-rate-cut http://boombustblog.com/blog/item/6092-a-quick-note-on-chinas-rate-cut

The MSM reported U.S. Stocks Rise as China Cuts Interest Rates this morning. China Cut Their Rates for First Time Since '08, and we all know what happened in 2008, right? As the momentum driven, server controlled trades ramped the markets up, I placed Armageddon put (way out of the money, with material time value) purchases on throughout the morning - for literally pennies. This was to accent the FIRE sector work that I have been putting on throughout the month (see Reggie Middleton Sets CNBC on FIRE!!!). As you can see from the archived posts and videos below, I always believed that China was a Ponzified bubble with no true organic growth to speak of, and if the Europeans and the global economy was waiting for this country that ramped up lending into a pile of expanding NPAs to bailout out the world, then put profit expansion, here I come!

Monday, 06 February 2012 11:20reggie_speaks

 reggie_speaks

A 7 minute video of my opinions on Greek haircuts, US and Manhattan real estate overvaluation, China bubble busting and hard landings, Case Shiller shortcomings and Germany's penthouse suite in the EU roach motel.

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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

 

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???):

Look, Big Surprises Coming from the UK and China!!! UK and Chinese Growth Slower Than Expected, but Exactly Where BoomBustBlog Said It Would Be

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reggie@youcanreachmeatthisemail.com (Reggie Middleton) BoomBustBlog Thu, 07 Jun 2012 11:20:39 -0400
Reggie Middleton Speaks On China, Greece Playing Chicken and US Ponzinomics http://boombustblog.com/blog/item/5996-reggie-middleton-speaks-on-china-greece-playing-chicken-and-us-ponzinomics http://boombustblog.com/blog/item/5996-reggie-middleton-speaks-on-china-greece-playing-chicken-and-us-ponzinomics

 reggie_speaks

A 7 minute video of my opinions on Greek haircuts, US and Manhattan real estate overvaluation, China bubble busting and hard landings, Case Shiller shortcomings and Germany's penthouse suite in the EU roach motel.

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 Below I have aggregated hours worth of related content via video, blog postings and subscriber research...

 Related Videos

The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History Monday, 19 December 2011

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overseas, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has little effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks fail to roll over all of that underwater Eu mortgage debt?

Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

 

Interesting Documentary on the Power of Rating Agencies, Reggie Middleton Excerpts

Reggie_VPRO_Ratings_agencies

Continuing my rant on the effectiveness (not) of the ratings agencies, I bring to you an interesting documentary on the rating agencies' effect on the sovereign debt crisis in Europe, produced by VPRO Tegenlicht out of Amsterdam. You can see the full video here, but only about half of it is in English. I appear in the following spots: 4:00, 22:30, 40:00...  Reggie Middleton Discussing the Rating Agencies effect on Sovereign Europe

 Subscriber Research

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reggie@youcanreachmeatthisemail.com (Reggie Middleton) BoomBustBlog Mon, 06 Feb 2012 06:20:30 -0500
Sound Money Interview of Reggie Middleton (05-24-11), Aired on NYC's WNYE Radio http://boombustblog.com/blog/item/5604-sound-money-interview-of-reggie-middleton-05-24-11-aired-on-nycs-wnye-radio http://boombustblog.com/blog/item/5604-sound-money-interview-of-reggie-middleton-05-24-11-aired-on-nycs-wnye-radio

On 5/24/11 I recorded a podcast interview with the Sound of Money, an interesting financial show that airs on NYC's WNYE radio. You can listen to 46 and a half minutes of my viewpoints and opinions via this link, Sound-money-interview-of-reggie-middleton-05-24-11. Be sure to peruse the blog of the show as well.

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Mon, 30 May 2011 23:13:06 -0400
For Those Who Failed To Heed My Warnings On Portugal, Visualize The Contagion That Causes European Bank Failure!!! http://boombustblog.com/blog/item/5271-for-those-who-failed-to-heed-my-warnings-on-portugal-visualize-the-contagion-that-causes-european-bank-failure http://boombustblog.com/blog/item/5271-for-those-who-failed-to-heed-my-warnings-on-portugal-visualize-the-contagion-that-causes-european-bank-failure

For anybody who didn't catch the hint, another banking crisis the continuation of the banking crisis is inevitable. I've said it before, Is Another Banking Crisis Inevitable? This is the current landscape, undoubtedly fudged over by optimistic marks.

Banks NPAs to total loans

Source: IMF, Boombust research and analytics

Euro banks remain weak as compared to their US counterparts

Health of European banks is weaker when compared to US banks. European banks are highly leveraged compared to their US counterparts (11.1x versus 4.1x) and are undercapitalized with core capital ratio of 6.5x vs. 8.5x. Also, the profitability of European banks is lower with net interest margin of 1.2% compared with 3.3%. However, non-performing loans-to-total loans for European banks are slightly better off when compared to US with NPL/loans at 4.9% vs. 5.6%. Nonetheless, considering the backdrop of high exposure to sovereign debt in Euro peripheral countries, we could see substantial write-downs for Euro banks AFS and HTM portfolio, which would more than offsets the relative strength of loan portfolio.

I really do mean substantial!

 

Impact of bank’s banking books on haircuts

EU banking book sovereign exposures are about five times larger than trading book. The table below gives sovereign exposure of major European countries for both trading and banking book. The EU trading book has €335bn of exposure while banking book has €1.7t exposure towards sovereign defaults. EU stress test estimated total write-down’s of €26bn as it only considered banks trading portfolio. This equated to implied haircut of 7.9% on trading portfolio with losses equating to 2.4% of Tier 1 capital. However, if the same haircuts (7.9% weighted average haircut) are applied to banking book then the loss would amount to €153bn equating to 13.8% of Tier 1 capital.

We have also presented an alternative scenario since we believe that EU stress test had failed not only to include banks HTM books but also the loss estimates were highly optimistic, as has much of the economic and financial forecasting that has come from the EU. It is highly recommended that readers review Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for a detailed view of a long pattern of unrealistically optimistic forecasting. Here's and example...

image031.png

Revisions-R-US!

Now, enter the sovereign entity of default to be known as Portugal!

Portugal has just illustrated the worst of the potential path to contagion - runaway free market rates. Thier latest debt auction results reveal... The yields on their 6 Month bill literally spiked from 2.984% three weeks ago to 5.117%. People, that is nearly double their funding cost from just THREE WEEKS ago. This is the definition of unsustainable. The 12 Month jumped from 4.311% to 5.902%.

Putting this into perspective, Portugal will pay 20.2 basis points more to issue 1 year debt in its own name than it would pay to borrow 5 year debt from the EFSF (European bail out credit facility). You don't need me to tell you that this is a bailout or default waiting to happen – and very, very soon.  Here's the post where I laid it out on the line: Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis!Remember, I included a full

Attention subscribers: A new subscription document is ready for download File Icon The Inevitability of Another Bank Crisis

Portugal bond haircut analysis for all to peruse. This is the time that it's most useful, and if anything it is on the optimistic side.  There’s actually a chance a credit event may occur by the time I give my Gloom and Doom speech in Amsterdam (www.seminar.ingref.com). Many people have asked me if there is chance CRE will pull through since many pockets are showing improvements. It's as simple as your belief in whether CRE can thrive in a stagflationary environ with sharply spiking interest rates amid shaky and collapsing banks. I've made my viewpoints clear:

Greece and Ireland are in very similar boats, despite being post bailout. And as all know, I have warned thoroughly about both of these nations through ample analysis. Instead of going through each and every one of my posts that fill the bill, look at the early work (with subscription material) or my latest European opinion and analysis. Of course, by now I'm not the only one to sound the alarm that an interest rate storm is about to erupt and it will travel the world.

From CNBC: Euro Zone Considers Greek Restructuring: Report

Some euro zone governments are concerned highly indebted Greece will not be able to refinance itself and may have to restructure its debt, the Financial Times Deutschland reported on Wednesday. The newspaper said representatives of several euro zone governments told the paper that a restructuring could no longer be ruled out. ..."An extention and top-up of the aid package would not be politically possible. Then, consequences would have to be drawn," the paper quoted a source in the finance ministry of a large euro zone country as saying.

 

It also quoted an advisor to the leader of an EU state as saying: "We must have a plan B ready" for the possibility Greece requires more financial assistance. Greek and European officials have long insisted that Greece can recover without restructuring its debt, and that even discussing a restructuring now would be counter-productive by damaging banks across Europe and causing panic in markets. On Saturday, the International Monetary Fund denied a report in German magazine Der Spiegel that it was privately pressing Greece to restructure its debt.

From JP Morgan, via the FT.com:

Irish banks have recently issued €18bn of notes backed by government guarantees with the aim of replacing expensive ELA funding from the Irish Central Bank (at the ECB’s marginal lending facility of 1.75% plus a penalty) with ECB funding at 1%. This replacement is likely to be reflected in the end- February financial statement of the Irish central bank. As of the end of January, Irish banks borrowed €126bn from the ECB (down €6bn from December) and €51bn from the national central bank’s ELA (unchanged from December).

The issuance of state guaranteed notes not only allows Irish banks to unwind their ELA dependence and reduces the cost of borrowing from central banks, but it also protects them against rating downgrades. Rating downgrades of non-guaranteed bonds raises the haircut applied by the ECB or in extreme cases can make these non-guaranteed bonds ineligible with the ECB.

This has been a problem for Greek banks, which, at the end of last year rushed to issue €25bn of government guaranteed bonds to meet new, more punitive collateral requirements by the ECB. The Greek government has just extended state-guarantees to Greek banks by another €30bn, on top of €55bn of outstanding state-guaranteed bank bonds. It appears that one Greek bank has already made use of the new €30bn liquidity package, issuing €1bn of government- guaranteed paper this week.

To the extent that this extra €30bn is being used by Greek banks, it will mean that from the €140-150bn of collateral that Greek banks have posted with the ECB so far, almost all of it will be government-related collateral (€85bn of stateguaranteed bank paper, €45bn of Greek government bonds owned by Greek banks and €8bn of zero-coupon bonds which the Greek government had lent to Greek banks in 2008). The huge exposure to government-related collateral puts the ECB at a huge disadvantage in the event of government restructurings/defaults.

If you remember, I warned of this months ago! This literally getting uglier by the second. Reference:

Additional prescient posts and related research on the Greek and Irish topic, all from last year!

The UK is showing signs of very real stagflation. For those who haven't already, browse through my recent posts on how many are confusing inflation with the more damaging stagflation:Inflation Misconceptions Hide A Downright U-G-L-Y Real Estate Landscape! – Part 1 andInflation Is When The Price of The Most Valuable Things (Such As Your House or Small Business) Drop Precipitously During High Unemployment, Right???!!! And back to the UK...Industrial production and economic activity is dropping, via AP (h/t ZeroHedge): UK industrial production in surprise drop in Feb

LONDON (AP) — British industrial production fell 1.2 percent in February from January, an official report said Wednesday, marking the largest monthly fall since August 2009 and far worse than analyst expectations for an increase of 0.2 percent. The Office for National Statistics said a 7.8 percent drop in oil and gas extraction was the main reason for the fall, while the manufacturing sector was flat. For the December-February period, overall industrial production was up 0.8 percent

But, inflation is rising...

Mar 25, 2011 ... There is a significant risk that the U.K. inflation rate could soon exceed 5%, according to the minutes of the Bank of England's Monetary ...
Mar 19, 2011 ... U.K. inflation probably accelerated to the fastest pace since October 2008 in February, which may sharpen the divide among Bank of England ...
Mar 22, 2011 ... Inflation is rapidly coming to the UK. Consumer prices in February jumped 4.4%, vs 4.2% expectations. The number was 4% in January. ...

The US Is Losing The Race To Insolvency, But Not For Lack Of Trying!

Of course, the US is close to insolvent (not there yet though, but we’re working on it). Our housing problem is worse than it ever was in the market crash of 2008 - see In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse

and Further Proof Of The Worsening Of The Real Estate Depression. As a matter of fact, it's what caused the global crash to begin with. Despite that, the banks that hold the loans to these underwater loans have increased 300% in price, doled out record bonuses, and are reinstating dividends while the country that bailed them out and transferred private debt onto the tax paying public needs to raise the debt ceiling yet again.

Japan may be approaching 250 - 300% debt to GDP, the highest of any developed nation.

See Can Contagion Be Avoided Considering The Magnitude Of Japan’s Woes? Most already know Japan’s issues, which started when they were at a 200% debt to GDP ratio. Some say it will take $350 billion to dig them out of the hole which will make them the most indebted developed country in the world with a good portion of their infrastructure damaged.

How Did We Get Into Such A Global Mess??? Thank our central bankers, who won't prick a blowing bubble, but will pull their ass hairs out to try to reinflate a popped one!!!

And this is the cause of all of this mess...

Do Black Swans Really Matter? Not As Much as the Circle of Life, The Circle Purposely Disrupted By Multiple Central Banks Worldwide!!! or put a little more poetically, Did Bernanke Permanently Cripple the Butterfly That Is US Housing? Interested readers can follow me on twitter and review our latest European opinion and analysis. I will be lecturing on this "realistic" style of analysis as the special guest speaker and keynote at the ING Real Estate Valuation seminar in Amsterdam. I will also introduce the structured products that we have been working as a solution to this mess that we see ourselves in. See www.seminar.ingref.com. The event is sold out with a waiting list, but I hear there were a few last minute cancellations.

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Wed, 06 Apr 2011 10:31:43 -0400
Inflation Misconceptions Hide A Downright U-G-L-Y Real Estate Landscape! - Part 1 http://boombustblog.com/blog/item/5235-inflation-misconceptions-hide-a-downright-u-g-l-y-real-estate-landscape-part-1 http://boombustblog.com/blog/item/5235-inflation-misconceptions-hide-a-downright-u-g-l-y-real-estate-landscape-part-1

Here's a quiz for you. An ages old correlation that has pretty much remained rock solid is now upon us. Real estate has been highly correlated to inflation and has acted as an inflation hedge for a very long time. This makes sense, since hard assets that both throw off income and have an actual demand for physical use (in other words, they have have intrinsic value) that hold when fiat currencies assimilate toilet paper in both value and use as input prices skyrocket. The question du jour is, "What happens when you have a glut of unused real estate supply abound in a tight credit environment, a guaranteed increase in rates AND higher input prices?". Of course the smart people out there (in other words nearly everyone with the impetus to read BoomBustBlog) are then forced to challenge the thesis, "So is this time different? After all Reggie, you have been bearish on real estate."

The short answer is, no this time is not different. It rarely ever - if ever - different this time. The key is the terminology. You see, many in the media are throwing around the word "inflation", and understandably so as they see prices (particularly staples, commodity and input prices) and money injected into the system go up appreciably. The problem is that the core real assets are not only in a deflationary cycle, but in a downright depression - reference . How can you have inflationary input prices and deflationary real asset prices amid stagnant employment? The answer is STAGLFATION! I have been calling for stagflation since 2008, and it definitely seems as if I called it correctly. Keep in mind that this will be one of the corner stone topics discussed in the ING Real Estate Valuation seminar in Amsterdam on April 8th, which has now sold out its capacity of 250 seats -see www.seminar.ingref.com. Amsterdam is a very interesting city to have such a discussion, for the pundits there are calling for a 25% office vacancy rate at a time of increasing inflationary pressures. On top of that, they have actually called in the world's leading real estate bear as the keynote speaker! It should be fun. I actually have an implementable solution to this mess. I wouldn't necessarily call it light at the end of the tunnel, but it is a way of pricing, valuing and transacting in these depreciating, illiquid assets correctly. Something that is currently lacking. Let's dig in, shall we...

Input Prices Skyrocket world wide just as Reggie Warned back in 2008, but the media mistakenly calls it "Inflation"!

Inflationary aspects abound in the US, Europe, Asia and particularly in China. China is the exception here, for China has true inflation (not merely inflationary aspects) with increasing money supply, increasing input costs, increasing labor costs, increasing commodity prices and increasing (bubble???) real asset prices. Then again, I also believe China is in an inflationary bubble that needs to either burst or be deflated, You don't get 30 years of growth in 3 years without breaking something. See What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? and Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble)...

[iframe http://bcove.me/gai3xors 540 500]

Choice quotes from the retailer with the most pricing power in the whole, wide world!

Inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate."

"Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along," Long says. "Except for fuel costs, U.S. consumers haven't seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory."

Wal-Mart, for example, could have "access to any factory in any country around the globe" to mitigate the effect of inflation in the U.S., Long says.

Still, "it's certainly going to have an impact," Long says. "No retailer is going to be able to wish this new cost reality away. They're not going to be able to insulate the consumer 100%."

We also have the WSJ reporting Euro-Zone Inflation Hits 29-Month High

The euro zone's inflation rate jumped unexpectedly to its highest level for 29 months in March, strengthening the case for the European Central Bank to raise interest rates.

To add to the above: South African Producer-Price Inflation Accelerates by More Than Expected. How about those input prices???

Of course, if the ECB raises rates, its game over for that European CRE that looks towards a 25% vacancy rate in the upcoming year according to ABN Amro. Reference the Dutch financial rag  Financieel Dagblad with a rough translation courtesy of Ernst's blog:

The number of vacant commercial and  office buildings in The Netherlands will only increase the coming years. Influenced by the “new working” trend, the need for office space will drop by 10%. [New working is working at home instead of at the office, using modern communication tools, like computers, smartphones and mobile internet. The countrywide coverage of broadband (mobile) internet enables people to stay at home and do their normal day job – EL]

At this moment already 14% of the office buildings in The Netherlands is abandoned. This is stated by a report of ABN AMRO. The bank fears that in 2015 this number will be about 25%. Also a diminishing civil service is one of the causes. “These factors have a sturdy negative impact on the appraisal of Commercial Real Estate (CRE). Especially in the eyes of the large banks”, according to Erik Steinmaier, manager of Research at the CRE branch of ABN AMRO.

The increasingly serious vacancy of CRE is a millstone for financial companies and pension funds. Steinmaier estimates that banks financed in average 60% of the office buildings. This would mean that banks have for about €30 bln in CRE loans on their balance sheet. A lot of these office building are currently appraised at a too high value. It is unclear how much has to be written off in the bleak scenario of ABN AMRO. Since 2007 the value of investments of institutional investors in CRE has diminished by 15%. And according to Steinmaier the financial crisis in CRE hits silently like an assassin. “The worst has yet to come”.

Consultancy firm Twynstra Gudde that assisted in writing the ABN AMRO report states that one third of the large users of office space is planning to fit up flexible working spaces. Working at home should eventually lead to a decrease in demand for office space of 3 mln sqr meter (32.2 mln sqr feet), according to ABN AMRO. The government, using about 21% of total office space in The Netherlands, will have cutbacks up to 2.75% of the civil service labor force. Civil service currently uses 6 mln sqr meter (64.4 mln sqr feet) of office space. Especially The Hague, The Netherland’s own Washington, is hit disproportionately by these cutbacks. Vacancy of CRE in The Hague could hit the 30% mark.[…]

I am on record saying the same thing on BNR Dutch News Radio just a few months ago. That very same radio station broadcasted an interview with Maarten van Poelgeest, alderman of the city of Amsterdam, who states (summarized, again translation courtesy of Ernst's blog):

In some areas of Amsterdam the vacancy of CRE hits the 40% mark.Of this about 60% is structural vacancy. These office buildings need a different purpose of usage, as they will probably never be rented anymore. The local government needs to change the zoning schemes for these office buildings and should turn them into homes for students or tennants that have no access to public housing, as their income is too high. A lot depends on the owner of the building, i.e. the large banks, big realtors and pension funds. They should take their losses on CRE.

I called this as far back as 2008 and just did a lecture on the issue a couple of months ago.

[youtube MukxtjCVc5o]

As we all know, the US is not one to gloat on the CRE issue. The derivatives based on CRE have actually outperformed, and if you looked at the performance of MBS and REITs, one would have thought that the US was in a real estate bull market, pre-2007. Alas, that is the nigh fraudulent representations of derivative paper traded between insiders. The truth lies in the streets, where you see bricks, mortar and dirt falling in prospective value - particularly if you have your eyes open and just look a few quarters towards the future. I have went over this in detail in . It should be read by anybody who is bullish on CRE. Keep in mind that the difference between Dutch CRE and US CRE is that our central bank is much, much more adept at the extend and pretend game, while the Dutch are more on the delay and pray side of things. Look at it from an interest rate increase perspective, which is bound to happen in an inflationary environment:

Listen up people, HERE ARE THE NASTY FACTS!!!

Real estate is a highly rate sensitive asset class. Capitalization rates (the popular method of pricing real estate) is explained in Wikipedia as:

Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.[1] The rate is calculated in a simple fashion as follows:

 \mbox{Capitalization Rate} = \frac{\mbox{annual net operating income}}{\mbox{cost (or value)}}

Without going into a CRE class, when interest rates go up, cap rates generally go up as well and the value (or cost to purchase) of the property goes down in sympathy unless the rise in interest rates is offset by a commensurate or greater rise in net operating income. Now, either everybody believes that unemployment is going to drop towards zero  in an era of US austerity (reference Are the Effects of Unemployment About To Shoot Through the Roof? then see Budget AusterityGoldman Sees Danger in US Budget Cuts - CNBC) at the same time that historically low interest rates that actually went negative are going to get lower (see the Pan-European Sovereign Debt Crisis) ---- or cap rates are about to skyrocket. I'll let you decide!

As you can see above, CRE drops in value whenever yields spike more than the + delta in NOI. Looking below, you can see that US CRE actually runs to the inverse of the 30 year Treasury.

That visual relationship is corroborated by running the statistical correlations...

The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down??? Let's ask Portugal or any of the other PIIGS group. I have shown, very meticulously, how Portugal can not only afford the path that they are on (record high interest rates) but the losses that will come when they restructure (default) - for all to see. I have done the same with Spain, Ireland and Greece (for subscribers only). See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History (December 6th & 7th, 2010). Be sure to carefully and very thoroughly peruse the spreadsheet below to see the many scenarios present that show the NPV of investor losses due to haircuts and restructurings...

{iframe weight="630" height="500" frameborder="1"}https://spreadsheets.google.com/pub?hl=en&hl=en&key=0Ai5WJsM3KjltdDlWc2JQNnVYZG5FZzl2a09tVXZTY2c&output=html{/iframe}

Yesterday's post takes the Portugal risk situation to the next level: Portugal Is On The Verge Of Tapping Out, UFC Style – You Knew It Was Coming, Here’s The Analysis!

Since this has turned out to be quite the lengthy post, I have chopped it up into parts. Part 2 will be forthcoming. In the mean time, anyone who wants to find out more about me can follow this link  - Who is Reggie Middleton!!! and/or follow me on Twitter.

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Fri, 01 Apr 2011 07:01:08 -0400
Rescue Workers and Nuclear Specialists Face a "Suicide Mission" In Attempting To Prevent Nuclear Meltdown http://boombustblog.com/blog/item/5114-rescue-workers-and-nuclear-specialists-face-a-suicide-mission-in-attempting-to-prevent-nuclear-meltdown http://boombustblog.com/blog/item/5114-rescue-workers-and-nuclear-specialists-face-a-suicide-mission-in-attempting-to-prevent-nuclear-meltdown

The Huffington Post has an alarming story on its front page. Although alarming, I think we all know it to be fact before today.

The White House is preparing for a situation in Japan that could be "deadly for decades," a U.S. official tells ABC News. According to the official, the U.S. believes a larger evacuation zone should be imposed and that the next 24-48 hours are "critical."

"It would be hard to describe how alarming this is right now," ABC quoted the anonymous official as saying.

The nuclear crisis in Japan has intensified since the massive earthquake first damaged nuclear facilities. On Wednesday, the White House advised Americans within 50 miles of the Fukushima nuclear facility to evacuate and plant employees were temporarily forced to retreat as radiation levels "soared."

The difficulties caused by the evacuations were blamed for "escalating" the chances of a meltdown.

"They need to stop pulling out people -- and step up with getting them back in the reactor to cool it. There is a recognition this is a suicide mission," the unnamed U.S. official was quoted by ABC as saying.

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Wed, 16 Mar 2011 18:12:52 -0400
Can Contagion Be Avoided Considering The Magnitude Of Japan's Woes? http://boombustblog.com/blog/item/5075-can-contagion-be-avoided-considering-the-magnitude-of-japans-woes http://boombustblog.com/blog/item/5075-can-contagion-be-avoided-considering-the-magnitude-of-japans-woes

My condolences truly go out to the people of Japan. A massive earthquake, a horrifyingly destructive tsunami, and then multiple nuclear emergencies and radiation poisoning is more distress than any nation had had to endure in such a short period of time in recent history. I am reticent to discuss the ramifications of such, alas that is the crux of the analysis of BoomBustBlog. I have noticed that many professional investors are detached from the real world causes and consequences of volatility and large swings in the markets. In a way, I can sort of understand. It's like playing a video game. All you are doing is pushing buttons in reactions to changing pixels on a glowing screen. Unfortunately, the reality of the matter is sometimes much more than that. Thus, as we go on to illustrate what I see will probably come out of this situation, let’s keep in mind that real people are getting hurt to very significant extent. Real children, real families, real grandparents...

[youtube MBhpn6p6wuY]

[youtube oQ15NtzeW8k]

[youtube 5ZN7URkabX0]

From CNBC: Japan Braces for Potential Radiation Catastrophe

Prime Minister Naoto Kan urged people within 30 km (18 miles) of the facility north of Tokyo to remain indoors and conserve power amid the world's most serious nuclear disaster since the Chernobyl disaster in Ukraine in 1986.

As concern about the crippling economic impact of the nuclear and earthquake disasters mounted, Japanese stocks fell as much as 14 percent before ending down 9.5 percent, compounding a slide of 7.6 percent the day before. The two-day fall has wiped some $620 billion off the market.

 

The French Embassy in Tokyo warned in an 1 am London time advisory that a low level of radioactive wind could reach the capital -- 240 km (150 miles) south of the plant -- in about 10 hours.

Also in the news, Nikkei Plummets as Panic Spreads, Futures Tumble Worldwide on Japan Nuclear Crisis and BoJ Pumps More Funds.

BOJ Fails to Contain Investor Panic as Nuclear Danger Rises

The Bank of Japan’s step to provide short-term liquidity and expand an asset-purchase program failed to contain investor panic today as the risk of nuclear radiation leaks north of Tokyo escalated.

Stocks Slide as Japan Plummets on Nuclear Concern; Oil Falls

Stocks dropped, with the Topix index posting its worst two-day plunge since 1987, and Japan’s default risk jumped as Prime Minister Naoto Kan said the danger of further leaks from a nuclear power plant damaged by the nation’s biggest earthquake was increasing. Commodities fell.

While at the same time, those countries on the other side of the world are wish-washing on how to climb out of the hole -  Euro-Area Nations Divided Over Method for Boosting Aid Facility

European governments remained divided over how to boost the rescue fund for debt-strapped countries, taking the gloss off a weekend pledge to step up the fight against the fiscal crisis.

As I type this at 5:34 am EST, S&P futures are down 35.70 points. Here's a snapshot of the rest of the world a couple of hours earlier.

STOXX 50 2793.95 -58.16 -2.04%
FTSE 100 5690.55 -84.69 -1.47%
CAC 40 3804.14 -73.90 -1.91%
DAX 6686.18 -180.45 -2.63%
FTSE MIB 21484.20 -320.15 -1.47%
Nikkei 8605.15 -1015.34 -10.55%
TOPIX 766.73 -80.23 -9.47%
Hang Seng 22678.20 -667.63 -2.86%
S&P/ASX 200 4528.70 -97.70 -2.11%
Shanghai 2896.26 -41.37 -1.41%

In January, I posted In said missive I illustrated that Japan's 200%+ debt to GDP ration, although not the same threat as Europe's lower but more immediate issues, simply cannot be ignored, as excerpted:

The Potential for Spillover Effects Simply Cannot Be Ignored If You Look At This From An Empirical Perspective

A key risk in sovereign default is the spillover effect due to interlinkages in the financial system, reference"Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?" Sovereign defaults transmit risks ACROSS asset classes, and a crisis in one country can easily engulf others due to cross border exposures. Empirical data points out that sovereign default are usually clustered. The Asian financial crisis of 1997–98, when sovereign debt problems hopscotched from economy to economy, is a testimony to what could happen to Europe this time around. In addition, the spillover effect also affects corporate bond yields as company’s ability to borrow money not only depends upon its own creditworthiness, but also on the financial health of its home-country. When investors lose confidence in the government's ability to use public finances they demand a premium to access capital to corporates, raising the financing costs. A downgrade in sovereign ratings/default also has negative affect on the stock markets.

The charts below show bond volatility and equity volatility across major markets - US, UK, Germany and Japan. Both equity markets and bond markets across geographies are strongly correlated thus demonstrating cross border intervention. In addition, we have also shown interlinks between equity and bond market demonstrating cross-asset correlation.

Last year, we introducing the “BoomBustBlog Sovereign Contagion Model“, wherein we spent many analyst man/months to create a realistic model to capture the potential for social unrest, financial and economic contagion as they could skip across sovereign borders, continents, asset classes and hemispheres. We are in the final stages of a significant update to this model, which still stands as what we consider a tour de force in realistic risk modeling.

The equity markets quoted towards the beginning of this post, and the debt markets clearly show the high correlation that I spoke of above. A country with a 200% debt/GDP ratio is simply not in the condition to handle near simultaneous earthquakes of historical magnitude, Tsunamis and multiple nuclear disasters without transmitting contagion to the world's already highly indebted countries who are on the margin as it is. Three clear potential calamities stand out.

First, In A Scramble For Liquidity, Lower Quality Debt (We All Know Who That Is) Will Get Thrown Out The Window

One is the claim from many insurance companies that they don't stand to lose much from claims. The property and life insurer's who did not explicitly cover earthquakes and tsunamis may be off the hook claim-wise, but radiation poisoning is not an act of God and can potentially (and unfortunately) send claims and reserves through the roof. No matter which way you look at it, insurer's are going to need liquidity - be it for business continuity, casualty, property, life and/or health. They are going to need it now, and for the the longer tail stuff as well. Where do you think they will get this liquidity from? Well, the BoJ is Pumping More Funds into the Japanese Economy, but they have been doing that for 21 years. The need now is greater than ever. The Japanese insurers (a large industry in Japan), are probably going to start selling off bond inventory, and that is going to pressure yields. The will sell off the most liquid stuff immediately (but hat will be ameliorated in part by the BOJ pumping cash in to support prices) and look to dump speculative experiments that will be difficult to move if spreads widen farther (if they are smart). That means any Eurozone periphery debt will be thrown out. Subscribers can download the current production contagion models below which clearly illustrate who said countries will be:

I'm sure you can all guess what may happen next, with the high volatility, correlation, and added selling pressures.

Second, Real Estate Is All About Location 3, or Location, Location, Location. There's Very Little That Is Worse For Your Real Estate Location Qualities Than Lethal Doses Of Radiation Poisoning

As you can see, Japan has had a very rough time of it real estate-wise over the last two decades. This situation will significantly exacerbate it, particularly with radioactive winds approaching Tokyo and the possibility of an evacuation existing.

From Reuters: Radiation fears spark panic buying, evacuations in Tokyo

Panic swept Tokyo on Tuesday after a rise in radioactive levels around an earthquake-hit nuclear power plant north of the city, causing some to leave the capital or stock up on food and supplies.

 

Embassies advised staff to leave affected areas, tourists cut short vacations and some multinational companies told staff to move from Tokyo out after low levels of radiation were detected in one of the world's biggest and most densely populated cities.

 

In one sign of the panic, Don Quixote, a multistory, 24-hour general store in Tokyo's Roppongi district, was sold out of radios, flashlights, candles, fuel cans and sleeping bags on Tuesday as a Reuters reported visited the shop.

 

... Winds over the troubled Fukushima Daiichi nuclear-power complex, about 240 km (150 miles) north of Tokyo, are blowing slowly southwesterly toward Tokyo but will shift westerly later on Tuesday, a weather official said.

 

Some scientists, however, urged Tokyo to stay calm.

 

"Radioactive material will reach Tokyo but it is not harmful to human bodies because it will be dissipated by the time it gets to Tokyo," said Koji Yamazaki, professor at Hokkaido University graduate school of environmental science.

 

"If the wind gets stronger, it means the material flies faster but it will be even more dispersed in the air."

 

University of Tokyo professor of bioengineering Hiroyuki Takahashi added: "If the nuclear fuel remains contained, there will be very little health risk."

Could you imagine trying to sell your apartment and having to explain that to the prospective buyers? Imagine if the buyers came back with the retort: "But the news reports from this morning read:  "The level seems very high, and there is still a very high risk of more radiation coming out," Prime Minsiter Naoto Kan said. Kan said most people have left the 20-kilometer evacuation zone around the plant, and he advised people within a 30-kilometer (19-mile) radius to stay indoors to avoid possible radiation poisoning. "It is likely that the level of radiation increased sharply due to a fire at Unit 4," Chief Cabinet Secretary Yukio Edano said. "Now we are talking about levels that can damage human health. These are readings taken near the area where we believe the releases are happening. Far away, the levels should be lower." UPDATE - Third Reactor Core Exposed to Air in Japan ... and Nuclear fuel rods fully exposed at Japan reactor - Jiji - Mar 14, 2011 · ... Nuclear fuel rods at aquake-stricken Japanese nuclear reactor are now fully exposed,Jiji ...

 

FLEEING TOKYO... The Czech Symphony Orchestra left Tokyo by bus for Ishikawa prefecture on the west coast.

 

"Some of them wanted to go home after the earthquake but it's pretty much impossible to get tickets for a hundred people now," said Hitomi Sakuma, a friend of the orchestra who was seeing them off at a Tokyo hotel. About 350 Japan-based expatriates at Infosys Technologies Ltd, India's second-largest software services exporter, are returning to India, its chief executive said.

As reported by the Star: 

Though Kan and other officials urged calm, Tuesday's developments fueled a growing panic in Japan and around the world amid widespread uncertainty over what would happen next. In the worst case scenario, one or more of the reactor cores would completely melt down, a disaster that could spew large amounts of radioactivity into the atmosphere.

 

“I worry a lot about fallout,” said Yuta Tadano, a 20-year-old pump technician at the Fukushima plant, who said he was in the complex when quake hit.

 

“If we could see it we could escape, but we can't,” he said, cradling his 4-month-old baby, Shoma, at an evacuation centre.

 

The radiation fears added to the catastrophe that has been unfolding in Japan, where at least 10,000 people are believed to have been killed and millions of people have spent four nights with little food, water or heating in near-freezing temperatures as they dealt with the loss of homes and loved ones. Up to 450,000 people are in temporary shelters.

 

Asia's richest country hasn't seen such hardship since World War II. The stock market plunged for a second day and a spate of panic buying saw stores running out of necessities, raising government fears that hoarding may hurt the delivery of emergency food aid to those who really need it.

...  Afterward, officials just south of the area reported up to 100 times the normal levels of radiation, Kyodo News agency reported. While those figures are worrying if there is prolonged exposure, they are far from fatal.

 

Tokyo reported slightly elevated radiation levels, but officials said the increase was too small to threaten the 39 million people in and around the capital, about 270 kilometres away. Closer to the stricken nuclear complex, the streets in the coastal city of Soma were empty as the few residents who remained there heeded the government's warning to stay indoors.

 

Kan and other officials warned there is danger of more leaks and told people living within 19 miles (30 kilometres) of the Fukushima Dai-ichi complex to stay indoors to avoid exposure that could make people sick.

... In Tokyo, slightly higher-than-normal radiation levels were detected Tuesday but officials insisted there are no health dangers. “The amount is extremely small, and it does not raise health concerns. It will not affect us,” Takayuki Fujiki, a Tokyo government official said. Kyodo reported that radiation levels nine times higher than normal were briefly detected in Kanagawa prefecture near Tokyo and that the Tokyo metropolitan government said it had detected a small amount of radioactive materials in the air. Edano said the radiation readings had fallen significantly by the evening.

Honestly, it is these "The situation is contained" comforts issued by government officials that should give the populace pause. Just ask the US citizens about the subprime crisis.

Third, At 200% Debt to GDP, Can Japan Afford This Without A Resustucturing?

This is the question of the day. I will go though the subscriber contagion models and trace the potential linkages of Japanese contagion in my next post on the topic. In the meantime, Why Japan at 200%+ Debt to GDP Is In Much Better Shape Than Much Of Indebted Europe.I have also made an FX trend model available for all to download. Its 10 mb, containing a lot of data, but you'll definitely get your money's worth. The model is available here: BoomBustBlog Complimentary FX Index model

[youtube 9z0X9ng7tMM]

Related inflationary reading:

Inflation Cartoons From The BoomBustBog Constituency

The Spectre of Stagflation is STILL Raising Its Ugly Head!

Continuing the Deflation/Inflation/Stagflation/Depression/Recession Rant…

All Throughout Last Year and During the Inflation/Deflation Camp Debates, I Warned of the Risks of Stagflation. Did I Have a Point? Let’s Look at the Numbers Behind the Numbers…

BoomBustBlog China Focus: Inflation?

BoomBustBlog China Focus: Interest Rates

Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Tue, 15 Mar 2011 07:01:00 -0400
The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike http://boombustblog.com/blog/item/4846-the-inevitable-has-finally-been-admitted-in-europe-the-macro-experiment-has-ignited-inflation-without-commensurate-growth-rates-will-spike http://boombustblog.com/blog/item/4846-the-inevitable-has-finally-been-admitted-in-europe-the-macro-experiment-has-ignited-inflation-without-commensurate-growth-rates-will-spike

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:

What we set out to do was to adjust the pathways of apparent pure financial contagion with several, real world factors.

How likely is it that we can have 20 more years of housing price declines?

If you think about it, that is a lot of activity for just one week. The ECB is thinking about it was well. From Bloomberg, Mersch Says ECB May Warn of Upside Inflation Risks Next Week

European Central Bank council member Yves Mersch said officials may toughen their language on inflation next week, indicating a readiness to raise interest rates in coming months.

“I would not be surprised at most colleagues concluding that we have upside risks to price stability,” Mersch said in an interview in Luxembourg yesterday. With the economy strengthening and inflation in breach of the ECB’s 2 percent limit, policy makers will “inevitably” have to “rebalance our monetary policy stance,” Mersch said, without giving a timeframe.

The ECB, which has kept its benchmark interest rate at a record low of 1 percent for almost two years, is growing more concerned that soaring energy and food prices will drive up wages and entrench faster inflation. At the same time, raising borrowing costs too soon could exacerbate Europe’s sovereign debt crisis by increasing pressure on stressed banking systems in countries such as Greece and Ireland.

The euro rose more than half a cent $1.3643 after Mersch’s comments were published. Euribor futures extended a decline, with the implied yield on the contract expiring in December increasing seven basis points to 1.97 percent, as traders added to bets on higher ECB rates. German two-year government notes fell, sending the yield up six basis points to 1.44 percent.

In the subscriber document, File Icon Potential Spillover Effects from the Middle East to the EU we detailed the transmission mechanism that is the high correlations in the FICC markets.

With most of the developed nations choking on NPAs and excess supply in their residential and commercial real estate markets, much of which served as a reflexive impetus for recession, the last thing anybody really needs is a spike in interest rates. Cap rate expansion, anybody???

The US residential...

The US commercial...

Japanese residential

Japan All Urban Land index, in the face of improving GDP!


I explained where all this will most likely end up in New Amsterdam a couple of weeks ago...

[youtube MukxtjCVc5o]

I will go in depth in Amsterdam in a little more than a month...

See www.seminar.ingref.com.

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Tue, 22 Feb 2011 07:38:06 -0500
Will China Hit That Inflation Deer In The Global Macroeconomic Headlights Anyway, Despite The Fact They Are Slamming On The Brakes? http://boombustblog.com/blog/item/4825-will-china-hit-that-inflation-deer-in-the-global-macroeconomic-headlights-anyway-despite-the-fact-they-are-slamming-on-the-brakes http://boombustblog.com/blog/item/4825-will-china-hit-that-inflation-deer-in-the-global-macroeconomic-headlights-anyway-despite-the-fact-they-are-slamming-on-the-brakes

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.

These events were telegraphed clear as day. I understand that it is difficult to be a fundamental investor with the broad market rising 98% from 2008 lows while the cause of said lows have simple been exacerbated. Looking at it this way, many bullish pundits are of the mindset that China will lead the world out of recession as China is slamming on the breaks to avoid the already inevitable inflation boom at the same time that much of Europe is showing signs of a double dip and America is struggling with rapidly depreciating housing stock, excess debt and what looks like a structural shift in unemployment. Keep hope alive if you wish, but it looks to me that the printing to pop equities has just created another Boom/Bust scenario to cure the Boom/Bust scenario that we have yet to of exited.

Don't say I didn't tell you so...

  1. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts Wednesday, February 3rd, 2010
  2. What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? Wednesday, March 10th, 2010
  3. BoomBustBlog China Focus: Inflation? Thursday, May 20th, 2010
  4. BoomBustBlog China Focus: Interest Rates Thursday, May 20th, 2010
  5. All Throughout Last Year and During the Inflation/Deflation Camp Debates, I Warned of the Risks of Stagflation. Did I Have a Point? Let’s Look at the Numbers Behind the Numbers… Monday, July 26th, 2010
  6. China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don’t Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences) Tuesday, November 23rd, 2010
  7. My China Ruminations Have Come to Pass As the Country Enters a Bear Market Tuesday, May 11th, 2010

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Fri, 18 Feb 2011 06:26:11 -0500
FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!! http://boombustblog.com/blog/item/4726-am-i-the-only-ardent-supporter-of-mark-to-market-accounting-fasb-appears-to-have-bent-over-for-the-final-time http://boombustblog.com/blog/item/4726-am-i-the-only-ardent-supporter-of-mark-to-market-accounting-fasb-appears-to-have-bent-over-for-the-final-time

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?
"Like the sword of Damacles, mark-to-market accounting has been hanging over the head of the economy. As long as it could be broadened, or brought back in the form it took in 2008, the risk of turning the next recession into a panic or even a depression was very real."
Nonsense and rubbish. If mark to market would have been implemented faithfully, the last crash would not have been asset based for the bank/developer/investor assets would have had the clarity of valuation that would have prevented the FUD (fear, uncertainty, and doubt) that surprised the banks (and their investors/insurers/stakeholders) and caused them to collapse in mid air. Notice how absolutely NO ONE was complaining about M2M between 2003 and 2007 when asset prices were flying through the roof! When the market started turning, banks wanted to keep their marks at the elevated BUBBLE prices and actually won the right to do so through regulatory capture - see About the Politically Malleable FASB, Paid for Politicians, and Mark to Myth Accounting Rules. The US banking system is now built upon one giant LIE! Reference More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture.

"According to Milton Friedman (in his book The Great Contraction), fair value accounting was the predominant force for bank closures in the early stages of the Depression. These bank failures fed on themselves making the Depression worse."
Oh, okay. It's good to learn that. I thought it was irrational exuberance, greed, and a run up of prices unfounded by the fundamentals.
"There is absolutely no academic research on the role of MTM accounting in the Great Depression"
'Nuff said! The authors seem to be either be lacking in credibility due to an obvious agenda or incapable of seeing the facts. Check this out...
"Nothing has changed. Back in 2009, Congress passed the Dodd-Frank financial regulation bill based on a flimsy theory of the crisis’s causes even before the report from The Financial Crisis Inquiry Commission. But that report would not have changed much policy anyway. On January 24, 2011 – the same week as FASB’s surrender – the FCIC said that the debacle was caused by a combination of stupid and unscrupulous business practices mixed with lax oversight by regulators. No surprise there"
Well, if M2M was adhered to and enforced, those business practices labeled as stupid would not have been profitable hence would not have been pursued - if pursued would have resulted in said institutions going out of business BEFORE they destroyed the economy! If banks were forced to retain the risk of loans that were written and that risk was regularly and accurate marked to market, any "stupid and unscrupulous business practices" would have resulted in the market putting said operations out of business and thus there would not have been as much of an effect from "lax oversight by regulators". You see, it really is that simple. I was able to witness much of this foolishness first hand as an investor. The only reason the banks through out money the way they did was because it wasn't their money they were throwing out, it was their naive investor's monies. Investors who didn't believe in ardent marking to market, obviously. If the collateral was properly vetted and marked, and the banks were forced to retain sizable risk, the pain would have been to great to push the bubble to anywhere near the heights it attained. Any institution that would have tried either would not have had access to the funding at a profitable rate, or would have simply been pushed out of business. Let the market work, don't just let it work when the prices are going up.

"It was on March 9, 2009 that Barney Frank’s committee announced a hearing on fair value accounting. FASB was brought to the table and forced to correct its misguided rule"
This says it all. Politicians are forcing accountants to do things their way. After all, how in the hell will accountants know as much about accounting as professional politicians such as Barney Frank do???!!!
"The stock market bottomed on that day and has virtually doubled since then. The recession was not ended by stimulus, TARP, regulations, PPIP, or any of the other alphabet soup government programs. It was ended by the correction of mark-to-market accounting. The risk of another Depression ended on that day and the economy and market have done nothing but move higher ever since."
Actually, the guarantee of reality catching up with the fantasy that was codified into regulation has been firmly entrenched. The authors are making the same error that many ivory tower and investors lacking in objectivity make, and that is assuming that the market prices necessarily and accurately reflect value. This is also a circular argument, because if the authors really had that much faith in the movement of the markets, why in the world would they argue against the markets pricing bank assets??? Again, and you will see this often, many pundits believe the market is right when it is going up, but it is dead wrong when it is going down. The Fed, Barney Frank, et. al., and the Treasury colluded to lift the prices of equities, real assets. government bonds, and the derivatives based upon them to considerably above their fundamental values in an attempt to reflate the bubble and pull the country out of recession the "stanky" way.
A natural result of this is that banks can easily hide the true condition of their holdings from most investors. Reference The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! wherein I detailed this occurrence:

 

 

fasb_mark_to_market_chart.png

I declared insolvency throughout the banking system, and it looked as if I was wrong for some time, then the truth’s ugly head started peaking out. See The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again!

Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.

Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs??? and I did it without being privvy to Goldman’s financial innards. Long story short, practically all of the major banks are lying about the value of some of the largest assets on their books.

How many institutional and/or retail investors will be able to ferret out such? Or more importantly, why should they have to? It is the reporting company's responsibility to report, not to obfuscate.

 

 

The big problem with this "hide the market marks" thing is that markets tend to revert to mean. Unless said market values fundamentally catch up with said market prices, you will get a snapback. That is what is happening in residential real estate now. That is what happened in Japan over the last 21 years!!! That's right, it wasn't a lost decade in Japan, it was a lost 2.1 decades!
This has been the first balance sheet recession that the US has ever had, but there is precedence to follow. Japan had a balance sheet recession following their gigantic real asset bust. They made a slew of fiscal and policy errors, which essentially prolonged their real asset recession (now officially a depression) for T-W-E-N-T-Y  O-N-E long years! For those that may have  a problem reading that, it is 21 long years. What did the Japanese do wrong?
  • They refused to mark assets to market
  • They attempted to prop up zombie banks
  • They failed to promptly clean up NPAs in the banking system
  • They looked the other way in regards to real estate value shenanigans

What was the result? Let's reference Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?

 

 

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 a 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…

top_20_banks.jpg

Source: Cap Gemini Banking M&A

 

 

Now, cross reference this chart with the graph immediately above it paying very close attention to the respective years in question. I should be able to stop this post at this point, for if you haven't gotten the message by now - you just ain't gonna get it.
"With FASB finally giving in on the issue for good, the future looks a lot brighter than most people suspect. The accounting rule fell, it has been ignored by most, but the impact of that fall is very good for America."
Well, its good for those astute and capable individual investors who can parse balance sheets and value assets on their own. Its an insult, slap in the face, and condemnation to a perpetual guessing game, Ponzi scheme and virtual casino for the average individual and institutional investor. Unless we want to read about this for practically all financial institutions that you risk putting your life savings in...
Goldman Sachs has revealed details of about $5bn in investment losses suffered during the crisis for the first time this week, in a move that will deepen the debate over companies’ financial disclosures. The figures, issued as part of internal reforms aimed at silencing Goldman’s critics, show that the bank suffered $13.5bn in losses from “investing and lending” with its own funds in 2008. But Goldman’s regulatory filings and its executives’ comments to investors at the time pointed to about $8.5bn of losses arising from its investments in debt and equity, as markets were rocked by the turmoil.
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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Wed, 09 Feb 2011 06:46:20 -0500
Why Japan at 200%+ Debt to GDP Is In Much Better Shape Than Much Of Indebted Europe http://boombustblog.com/blog/item/4659-why-japan-at-200-debt-to-gdp-is-in-much-better-shape-than-much-of-europe http://boombustblog.com/blog/item/4659-why-japan-at-200-debt-to-gdp-is-in-much-better-shape-than-much-of-europe

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.

In Japan, a near-term disruption in the government bond market remains unlikely as a result of stable domestic savings rates and healthy current account surplus. More importantly, Japan has one of the lowest concentrations of foreign sources funding (refer to the chart above) while Greece, Belgium, Portugal, Austria, Italy, Ireland, France and Netherlands have high exposure towards foreign funding.

Total Reserves less Gold-to-GDP

The nations covered in our Pan-European Sovereign Debt Crisis series also have significantly less reserves to serve as a cushion against shocks. Greece, U.S, Ireland, Portugal, Spain, Luxemburg and EU region at its entirety, all have total reserves excluding Gold below 2.5% of GDP compared with 39% for Asia and 31% for Emerging markets, and 15% against the world average.

With instability cropping up in the Middle East, there is just another reason to speculate as to when the charade in Europe will be exposed. We have our ideas who will be first. Reference First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? and Tracing The Path Of Egypt’s Disruption Sending Contagion To The Stronger Countries Of Europe and Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!!.




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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Wed, 02 Feb 2011 14:11:04 -0500
China Is In a Self-Imposed Bubble That Has Nowhere To Go But Bust! You Don't Get Something (Growth Through Stimulus) For Nothing (No Economic Consequences) http://boombustblog.com/blog/item/4041-listen-china-is-in-a-self-imposed-bubble-that-has-nowhere-to-go-but-bust-you-dont-get-something-growth-through-stimulus-for-nothing-no-economic-consequences http://boombustblog.com/blog/item/4041-listen-china-is-in-a-self-imposed-bubble-that-has-nowhere-to-go-but-bust-you-dont-get-something-growth-through-stimulus-for-nothing-no-economic-consequences

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:

I believe China's ability to alter its own course is grossly exaggerated. As a net exporter with relatively minimal internal consumption as a source of economic activity, it is basically at the mercy of importing nation's ability to buy their goods. Any attempt to stoke the ability of these nations importing will be ancillary at best. The "reported" success of their bubble blowing is showing only one side of the equation - the bubble blowing. Signs of a traditional bubble (such as the one whose bursting the US and Europe are struggling to escape from) are everywhere, yet the mainstream media has not focused nearly as much attention on such. Unless the laws of basic human nature has changed, expect to see China suffering from the effects of profligate excesses just as the others that tried to inflate their economies the quick and easy way did.
Less than an hour after typing said reply, Bloomberg reports: China Inflation May Be Too Hot for Controls Amid Cash Glut

Standing near his 12-table noodle shop on Beijing’s Yonghegong Avenue, owner Liu Heliang says meat and vegetable prices have climbed 10 percent in a year and staff wages are up 40 percent.

“I’m struggling to make ends meet with costs going up like this,” said Liu, a native of Sichuan province who pays his workers as much as 1,800 yuan ($271) a month, or 88 percent more than the Beijing minimum wage, to serve up a staple Chinese meal. “Raising prices is the only way out,” he said, predicting he won’t be able to hold out beyond two months.

Premier Wen Jiabao’s cabinet last week announced it will sell grain, cooking-oil and sugar reserves, ordered an end to tolls on trucks carrying produce and threatened price controls to rein in a 10 percent inflation rate for food. Because the measures would do nothing to counter the 54 percent surge in money supply over the past two years, the risk is they will prove insufficient to cope with the challenge.

“They are just not addressing the fundamental problem at all,” said Patrick Chovanec, an associate professor at Beijing’s Tsinghua University. With the expansion of credit and cash in the economy stemming from China’s response to the global crisis, “you’re sitting on a volcano,” said Chovanec.

Now, it didn't take a genius to figure out this would happen. As a matter of fact a slight dose of common sense (when was the last time you got something for nothing, really?), a little historical perspective or a BoomBustBlog subscription would have sufficed.

BoomBustBlog China Focus: Inflation? Thursday, May 20th, 2010

Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts Wednesday, February 3rd, 2010

What Are the Odds That China Will Follow 1920’s US and 1980’s Japan? Wednesday, March 10th, 2010

BoomBustBlog China Focus: Interest Rates Thursday, May 20th, 2010

My China Ruminations Have Come to Pass As the Country Enters a Bear Market Tuesday, May 11th, 2010


From Bloomberg: China Inflation Accelerates as Loans Surge, Property Prices Rise by Record

May 11 (Bloomberg) — China’s inflation accelerated, bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.

Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.

Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News Thursday, April 15th, 2010

Now That the MSM and Chinese Officials Admit There Is a Bubble In China…Tuesday, July 20th, 2010


Wednesday, July 7th, 2010, Excerpts from the HSBC forensic analysis featured in this post:

Below are the full forensic reports available for download to subscribers (click here to subscribe):

icon HSBC 170610 Professional & Institutional (554.65 kB 2010-07-07 06:23:52)

icon HSBC 170610 Retail (388.56 kB 2010-07-07 06:22:25)

We have performed a decent amount of analysis on HSBC in the past as well, and it has served as a very profitable short position in 2008. I have decided to release the dated analysis to the public for free,  it is available by clicking here: icon HSBC_Holdings_Report_04August2008 – pro (138.89 kB 2008-11-06 10:11:09)

For anyone interested in the myriad risks and opportunities abound in the HSBC market’s macro environment, I strongly suggest you review our sovereign contagion models (subscribers only):

icon Sovereign Contagion Model – Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)

icon Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)

And as China goes, Australia will most likely follow...

Aussi Bubble Video to Go With You Aussie Bubble Speculation? Saturday, June 12th, 2010

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.

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Tue, 23 Nov 2010 02:03:57 -0500
The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008! http://boombustblog.com/blog/item/3500-the-robo-signing-mess-is-just-the-tip-of-the-iceberg-mortgage-putbacks-will-be-the-harbinger-of-the-collapse-of-big-banks-that-will-dwarf-2008 http://boombustblog.com/blog/item/3500-the-robo-signing-mess-is-just-the-tip-of-the-iceberg-mortgage-putbacks-will-be-the-harbinger-of-the-collapse-of-big-banks-that-will-dwarf-2008

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!

fasb_mark_to_market_chart.png

Step two: Formulate intricate lies to placate the masses

In this case, the US bank stress tests: You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?. 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").

Step three: Being forced to face the music

This is where we are now, and I will go through this in more detail below

Step four: The eradication of US banks from global prominence

Not the floundering of the banks that I predicted in 2007 and 2008, but the outright collapse of many (and probably most) of the big ones, or at the very least significant shrinkage. Does this sound outrageous to you? 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 practically 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…

top_20_banks.jpg

Source: Cap Gemini Banking M&A

The European banks are not faring much better than the US banks,either - reference the Pan-European Sovergein Debt Crisis, as I see it. This is so much more serious than robo-signing scandals, and I have been shouting about this non-sense of 3 years straight. 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…



housing_price_futures.jpg

Source: Nomura on Balance Sheet Recessions

Keep in mind that the US housing futures data above is based on the unrealistically optimistic Case Shiller index - reference Those Who Blindly Follow Housing Prices Without Taking Other Metrics Into Consideration Are Missing the Housing Depression of the New Millennium.

Robo-Signing: What is the  real issue at hand?

The Robo-Signing issues have arisen because some mortgage servicers have been signing off foreclosure documents without actually reading them, or doing so without the presence of a notary. Thus, the Office of the Comptroller of the Currency (OCC) has directed seven of the US’ biggest lenders — BAC, JPM, WFC, Citi, HSBC, PNC and UBS  — to review their foreclosure processes. Consequently, Bank of America, JP Morgan Chase and GMAC Mortgage have suspended foreclosure cases in 23 states after noting their employees may have mishandled foreclosure documents. Goldman Sachs is following suit via their Litton Loans arm. It should also be noted that the document forgery issues penetrate much farther than just distressed properties and foreclosures. Evidence has surfaced that all types of forgeries and misrepresentations are abound in all types of mortgage paperwork. 4closureFraud (a sight where I sourced a lot of the recent robo-signing scandal info from) has a post that actually shows  President Obama's mortgage paperwork as a "Victim to Chase Robo-Signer" This mess, in and of itself, will be difficult to untangle.

For those who didn't notices, this is a regulatory "hold it" to the MERS system and an alert to its constituency, many of whom are subjects of extensive BoomBustBlog forensic analysis. Major MERS shareholders include:

These companies will start infighting as their myriad interest start to conflict with each other. Title insurers will balk at insuring what could be defective title, banks will fight insurers who will try to renege on insurance and/or put back loans through the warranties and representations clause as losses to investors mount though either increased expenses to work out the paperwork mess or outright losses due to fraud.

Make no mistake, the amount of litigation that is being thrown at these banks and service companies is significant, and they are shining lights on aspects of the banking world that were most conveniently kept secret, as in this class action suit that outlines the contradictory wording in the MERS paperwork (reference pages 10, 11 and 15). Pages 15 on makes issue of fraudulent assignments, of Robo-Signing fame - see for yourself;

Here is a deposition of one of the "said" secretaries from another suit in New Jersey...

Does MERS have any salaried employees?
A No.
Q Does MERS have any employees?
A Did they ever have any? I couldn’t hear you.
Q Does MERS have any employees currently?
A No.
Q In the last five years has MERS had any
employees
?
A No.
Q To whom do the officers of MERS report?
A The Board of Directors.
Q To your knowledge has Mr. Hallinan ever
reported to the Board?
A He would have reported through me if there was
something to report.
Q So if I understand your answer, at least the
MERS officers reflected on Hultman Exhibit 4, if they
had something to report would report to you even though
you’re not an employee of MERS, is that correct?
MR. BROCHIN: Object to the form of the
question.
A That’s correct.
Q And in what capacity would they report to you?
A As a corporate officer. I’m the secretary.
Q As a corporate officer of what?
Of MERS.
Q So you are the secretary of MERS, but are not
an employee of MERS?
A That’s correct.

etc…
How many assistant secretaries have you
appointed pursuant to the April 9, 1998 resolution; how
many assistant secretaries of MERS have you appointed?
A I don’t know that number.
Q Approximately?
A I wouldn’t even begin to be able to tell you
right now.
Q Is it in the thousands?
A Yes.
Q Have you been doing this all around the
country in every state in the country?
A Yes.
Q And all these officers I understand are unpaid
officers of MERS
?
A Yes.
Q And there’s no live person who is an employee
of MERS that they report to, is that correct, who is an
employee?
MR. BROCHIN: Object to the form of the
question.
A There are no employees of MERS.

And even more damning, this particular suit gets right to the heart of the matter from an economic AND legal perspective (something that the previous suits have not) and that is that the banks were complicit in overvaluing both the lender and the collateral at the point of underwriting, and doing so on a broad basis. This is the notion behind my premise that a wave of losses and litigation will be coming any minute now as investors and the insurers facing claims from those investors attempt to put back loans on a wide scale and near universal basis as the rampant fraud of the real estate bubble of the new millenium is exposed and litigated throughout the court system.Those entities that swallowed loan mills such as Wachovia, Countrywide, Nationwide, Lehman, Bear Sterns, Merrill Lynch and WaMu will be feeling their indigestion.

I read through portions of a couple of filings and there appears to be some technical errors and maybe even a slight misunderstanding of the banking business, but if these guys (the plaintiff's attorneys) get their act together in terms of coordinating with each other and getting some real expertise on the subject matter to bolster their filings, I really don't see how this will not - at the very least - materially drive the expense ratios of both the banks and the investment pools, and at worst hasten the inevitable demise of those entities that underwrote or bought the bad paper then paid the gift of US taxpayer capital (TARP,ZIRP, PPIP, etc. ) out as bonuses versus alleviating the matter at hand.

Impact on RMBS and CDOs

Most analysts believe that a break in foreclosures will not be an optimistic sign for Residential Mortgage Backed Securities (RMBS).  This is because RMBS portfolios that contain the foreclosure loans will likely experience higher loss severities due to longer liquidation timelines.  Additionally, the RMBS market is expected to witness a large number of repurchases as well as higher monetary losses and ratings downgrades if it is proved that loans were not serviced in accordance with regulatory guidelines. Of course, I believe that servicing is the minor issue. It is the faulty underwriting that is the canary in the goldmine here, and the servicing issues is simply the impetus that will shine the light on the premise that at least half of the high LTV loans written were done so on a fraudulent basis.

GMAC Mortgage Class Action Lawsuit Complaint Filed Over Alleged ...

Oct 4, 2010 ... GMAC Homeowners In Maine File Class Action Lawsuit Complaint Against GMAC Mortgage Over Alleged False Foreclosure Documents, Affidavits and.
classactionlawsuitsinthenews.com/class-action-lawsuits/gmac-mortgage-class-action-lawsuit-complaint-filed-over-alleged-false-foreclosure-docu... - Cached

Wrongful Foreclosure Class Action « Timothymccandless's Weblog

Jan 15, 2010 ... 13 Responses to “Wrongful Foreclosure Class Action” ... I would like to be included in your class action lawsuit. I am a victim of predatory ...
timothymccandless.wordpress.com/.../wrongful-foreclosure-class-action/

o    According to Canadian rating agency DBRS “The recent findings could have far reaching implications throughout the industry with hundreds of thousands of homeowners contesting foreclosures that are in process or have been completed; ultimately causing servicers to face losses due to expensive litigation and class action lawsuits. The biggest uncertainty remains on how the courts will view the “legality” of foreclosures that have already taken place and what actions, if any, will be taken to remedy the situation.

DBRS believes that servicers will be able to quickly correct and refile any deficient affidavits in addition to implementing the appropriate controls to ensure there is not another breakdown in process. However, RMBS that contain these loans will likely experience higher loss severities due to longer liquidation timelines, negative rating actions and the potential for loans to be repurchased out of the transaction due to breaches of representation and warranties if it is proven that they were not serviced in accordance with applicable guidelines. DBRS will continue to monitor the impact of this situation on its rated transactions and take any rating actions as necessary” (Source: http://ftalphaville.ft.com/blog/2010/10/05/360811/from-robo-signing-to-rmbs/)

o    Researchers at DBRS also highlighted that the robo-signing debacle will likely lead to a large number of residential mortgage-backed securities repurchases as well as higher monetary losses and continual ratings downgrades if it is proven that loans were not serviced in accordance with federal guidelines. (Source: http://foreclosureblues.wordpress.com/2010/10/04/rmbs-buybacks-expected-to-increase-due-to-robo-signing-dbrs/)

Every material development is impetus for the potential for putbacks due to breaches of representation and warranties Uncertainty in the RMBS market in terms of actual valuation is a result of rampant and provable inflation of appraisal prices during the underwriting of said mortgages and not so much falsification of documents since in many cases those documents can be cured, but misrepresentation cannot! You do not hear this in the media circuits, but it is a fact. Thus, the underwriting banks face the chance of systemic losses. I have warned of this about a year ago - Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again). You see, banks often allowed for the inflation of appraisal values and/or income/assets, but the broker channel did it as par for the course.

This is the part that everybody seems to be overlooking...

All you really need to do is find the banks that accepted a lot of broker business, factor in the expense of the class action suit litigation that is popping up in nearly every state (try Googling it, you will be amazed as big firms and store front lawyers alike are throwing their hats in the ring), and you will see the easiest way out of a potentially tough bind for investors is the put back. Where does this land? Squarely on the balance sheet of the banks - who, BTW have the money to attract even more predatory lawyers. A forensic review of high LTV loans between 2003 and 2007 should find that at the very least 30% were aggressively valued, with a more realistic number coming in at about 60%. Ask anyone who was in in the business at that time, I doubt they will disagree.

When I warned of this LAST YEAR, it was not taken very seriously. I suggest all should think again - Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results. Let’s reminisce…

Warranties of representation, and forced repurchase of loans

JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company’s income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk – much more so than the primarily direct writers. I’ll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu!

http://boombustblog.com/images/stories/regional_banks/32bustedbanks/thumbnails/thumb_image020.png

As I said, losses should be ramping up on the mortgage sector. Notice the trend of housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…

PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses.

Well, it looks as if I was onto something. From Bloomberg:

March 5 (Bloomberg) – Fannie Mae andFreddie Mac may force lenders includingBank of America Corp.JPMorgan Chase & Co.Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.

Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.

….

The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

Striking a Balance

“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]

Bank of America recorded a $1.9 billion “warranties expense” for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.

JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing.

“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.

“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”

Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.

Citigroup increased its repurchase reserve sixfold to $482 million, because of increased “trends in requests by investors for loan-documentation packages to be reviewed,” according to a Feb. 26 filing.

“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.

According to a WSJ analysis, the RMBS market may have a balanced impact with the junior bondholders typically at the bottom of the credit structure could actually end up better off than expected. Senior bondholders, typically at the top, could end up worse off.  This is because when houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale—the very end of the foreclosure processes—the holders of the junior, or riskiest debt, would be the first investors to take losses. But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream. In addition, how the allocation of cost of re-processing the foreclosed loans, which could be significant also, remains a key concern. (Source: http://ftalphaville.ft.com/blog/2010/10/07/363876/updating-the-us-foreclosure-scandal/)

However, some analysts and bond traders have a contrarian view that the “Robo-signing” issues will not have a significant effect on the RMBS valuations, as most RMBS investments have been made after stringent performance modeling (Yeeeahhh, right! Just like the HPA (perpetual housing price appreciation assumptions utilized by Fitch during the boom to dole out AAA ratings on subprime trash! This is total and absolute BULLSHIT, but I am including it so as to be as balanced as possible). More so, they believe that the actual impact on RMBS valuations will depend on how long it takes for banks to tackle the problem.

  • According to a RMBS manager at one capital market group, “the majority of investors currently involved in trading RMBS performed stringent performance modeling. Anyone who bought RMBS from 2006 and 2007, vintages from when presumably these robo-signed foreclosures were inked, would have run the collateral through extended resolution scenarios”. He also expects that bond rally will continue, and that problem would not emerge unless the robo-signing issue is not resolved in less than six months. As per the RMBS manager, "RMBS right now is trading like stocks. Besides, in the year-end, the book always goes up, it's window dressing the portfolio."
  • Another bond trader, who is also has a bullish view for the market, believes that every single major servicer will face problems similar to Ally and JPMorgan, but still expects RMBS to remain well-valued considering overall loss severities are level and constant repayment rates remain healthy (source: http://www.housingwire.com/2010/10/01/robo-signers-dont-scare-the-mortgage-bond-market).
  • According to Brett Schaffer, the president of Phoenix Capital Inc. and Phoenix Analytics Services Inc, “it's premature to determine how big of a hit the "robo-signing" scandal will have on servicing valuations. Much depends on how long it takes for servicers to address the problem. If this gets resolved in fairly short order within a month or six weeks and … there isn't any critical flaw in the mortgage servicers' practices in general, then I don't think it has really any impact," On the other hand, if it is determined that there is a material flaw and there is going to be long-term foreclosure halts, then it probably would have a material impact on those particular firms. It's not just a blanket statement for the market.”
  • According to Robert Lee, senior vice president at Mortgage Industry Advisory Corp. in New York, “Servicing costs are going to rise regardless of how long it takes for the issue to be resolved, as companies hire employees to work through the documents and the foreclosure process is delayed. But the impact of those higher costs on mortgage servicing asset values may be minimal because many servicers have been conservative in their estimates. Servicing rights themselves right now are weaker than where the cash flow values are.” He also estimated the hit to most portfolios' value from the fallout of the documentation scandal will be less than 10 basis points. (Servicing values are expressed as a percentage of the unpaid principal balance of the loans in a portfolio).

Overall, we at the BoomBust believe that the uncertainty on the impact of robo-signing on RMBS valuation will remain until the banks give clarity on how long the foreclosures are expected to remain suspended. 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. Watch the W&R number over the next two quarters for those banks that purchased cesspool portfolios such as Countrywide, National City, Wachovia and WaMu, and let me know if they start to skyrocket.


In the meantime, I will be updating my forensic valuations of the big banks that I have covered right about the time they report in the upcoming weeks. These updates will include Morgan Stanley, Goldman Sachs, PNC, Wells Fargo, and JP Morgan. I will put them through the realistic stress test scenarios that our government failed to and have the results available to paying subscribers. Of course, I will factor in the very real probability of a surge in W&R activity, just as I warned last year. This is something that is just not found in banking analysis that I see on the Street. Below is an example of what was done last year for PNC...

....

For those of you want to know what the stress tests results of the big banks were if they used the NY Fed/FDIC official loss data, I have run the numbers for you. It doesn’t look very pretty in some cases. This content is paid subscriber-only, except for the two links that have public-lite and public excerpt included! Let’s walk through the PNC free data, in light of how misleading their latest quarterly report was (see For those that didn’t notice – Reggie Middleton on PNCl Q3-09 Results and then be sure to read At What Point Does Accounting Gimmickery Become an Outright Lie? Let’s Ask PNC).

Click any of these graphics to enlarge…

pnc_stress1.png

Notice the amount of leverage that PNC is using if one were to use the NY Fed and FDIC data in lieu of what PNC has proffered through their take home test.

pnc_stress2.png

As you can see from above, there is a significant difference between what the government’s SCAP tests reveal PNC will lose and what the government’s NY Fed and FDIC call sheet data says PNC will lose – a very significant difference. Solely as a result of looking at this chart, one should be willing to demand a second round of considerably more stringent stress testing.

pnc_stress3.png

If one were to granularly break down the foreseen losses to PNC’s portfolio using the government data…

pnc_stress4.png

As you can see, going through each major loan category in PNC’s books reveals a much LESS optimistic scenario than ANY portrayed in their SCAP take home test results…

In an act of near unprecedented generosity, I have included the PNC valuation along with the Blackrock contribution in the free PNC lite public download below (in alphabetical order).

 


Subscriber content that reveals what the banks REALLY needed in terms of capital and cushions to whether the true rate of losses and unemployment to come. You may subscribe here to access this content.

Goldman Sachs Stress Test Professional Goldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 Mb

Goldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb

MS Simulated Government Stress Test MS Simulated Government Stress Test 2009-05-05 11:36:25 2.49 Mb

MS Stess Test Model Assumptions and Stress Test Valuation MS Stess Test Model Assumptions and Stress Test Valuation 2009-04-22 07:55:17 339.99 Kb

PNC SCAP Results recast using FDIC and NY Fed data - Pro PNC SCAP Results recast using FDIC and NY Fed data – Pro 2009-05-15 07:31:21 455.37 Kb

PNC SCAP Results recast using FDIC and NY Fed data - Retail PNC SCAP Results recast using FDIC and NY Fed data – Retail 2009-05-15 07:30:25 395.18 Kb

PNC Stress Test Pro PNC Stress Test Pro 2009-04-13 02:10:17 3.11 Mb

PNC Stress Test update - Professional PNC Stress Test update – Professional 2009-04-21 15:55:56 3.00 Mb

PNC Stress Test Retail PNC Stress Test Retail 2009-04-13 02:11:08 323.51 Kb

PNC Stress Test update - Retail PNC Stress Test update – Retail 2009-04-21 15:53:52 777.50 Kb

PNC stress test write up - public lite PNC stress test write up – public lite 2009-07-27 02:37:11 995.30 Kb

Sun Trust Banks Simulated Government Stress Test Sun Trust Banks Simulated Government Stress Test 2009-05-05 11:37:13 1016.17 Kb

JPM Public Excerpt of Forensic Analysis Subscription JPM Public Excerpt of Forensic Analysis Subscription 2009-09-22 14:33:53 1.51 Mb

I pointed out an anomaly in JP Morgan’s “blowout” quarterly earnings release - Reggie Middleton on JP Morgan’s “Blowout” Q4-09 Results. Let’s reminisce…












Warranties of representation, and forced repurchase of loans


JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company’s income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.

Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk – much more so than the primarily direct writers. I’ll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu!

http://boombustblog.com/images/stories/regional_banks/32bustedbanks/thumbnails/thumb_image020.png

As I said, losses should be ramping up on the mortgage sector. Notice the trend of housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…

PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses.

Well, it looks as if I was onto something. From Bloomberg:

March 5 (Bloomberg) – Fannie Mae andFreddie Mac may force lenders includingBank of America Corp.JPMorgan Chase & Co.Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.

Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.

….

The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

Striking a Balance

“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]

Bank of America recorded a $1.9 billion “warranties expense” for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.

JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing.

“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.

“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”

Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.

Citigroup increased its repurchase reserve sixfold to $482 million, because of increased “trends in requests by investors for loan-documentation packages to be reviewed,” according to a Feb. 26 filing.

“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.

]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Tue, 12 Oct 2010 06:21:36 -0400
Look, Big Surprises Coming from the UK and China!!! UK and Chinese Growth Slower Than Expected, but Exactly Where BoomBustBlog Said It Would Be http://boombustblog.com/blog/item/2876-look-big-surprises-coming-from-the-uk-and-china-uk-and-chinese-growth-slower-than-expected-but-exactly-where-boombustblog-said-it-would-be http://boombustblog.com/blog/item/2876-look-big-surprises-coming-from-the-uk-and-china-uk-and-chinese-growth-slower-than-expected-but-exactly-where-boombustblog-said-it-would-be

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)…

UK report pg 4

You see, things are materially worse than Britain is letting on. Now, if we were to reverse the exaggerations, optimistic assumptions and outright lies (speaking of which, reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!)…

uk_economic_estimtes.png


… and in terms of government balance over-optimism???

uk_gaovernment_balance_projections.png

Those interest in our higher end analysis can access our subscription services by registering here.

And from Asia:

]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Wed, 11 Aug 2010 09:11:53 -0400
Now That the MSM and Chinese Officials Admit There Is a Bubble In China... http://boombustblog.com/blog/item/2611-now-that-the-msm-and-chinese-officials-admit-there-is-a-bubble-in-china http://boombustblog.com/blog/item/2611-now-that-the-msm-and-chinese-officials-admit-there-is-a-bubble-in-china

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...

Cheap, labour-intensive products would be less vulnerable to drooping European demand than more expensive, discretionary goods, he added.

For those of you who believe the Euro member states that are already in depression will be able to continue their climb back up by riding the export train, think again... The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

Austria, Belgium and Sweden, while apparently healthy from a cursory perspective, have between one quarter to one half of their GDPs exposed to central and eastern European countries facing a full blown Depression!

Click to Enlarge…

cee_risk_map.png

These exposed countries are surrounded by much larger (GDP-wise and geo-politically) countries who have severe structural fiscal deficiencies and excessive debt as a proportion to their GDPs, not to mention being highly “OVERBANKED” (a term that I have coined).

Now back to the article...

Spain, Italy, Germany and non-euro member Britain are among EU countries that are tightening their budgets after Greece had to be bailed out in April, raising a red flag about the sustainability of public finances across Europe.

Furthermore, Brazil, India and other emerging economies have started to tighten monetary policy, the Commerce Ministry said.

"The room for the further growth of Chinese exports is limited," Yao said.

As a result, the ministry would keep in place policies aimed at supporting external demand for Chinese goods, including retaining export tax rebates.

...

Despite the expected slowdown, full-year factory output growth may be higher than the 11 percent targeted at the start of 2010, the Ministry of Industry said.

The Ministry of Commerce was also optimistic about consumer spending. Retail sales would keep growing rapidly over the rest of 2010 thanks to rising incomes and government policies to encourage consumption, the ministry said.

Overall, economists expect a further slowdown in economic growth, which moderated to an annual rate of 10.3 percent last quarter from 11.9 percent in the first three months of 2010.

"With growing signs of economic slowdown, we believe that the government will now start to discuss possible policy adjustments," Ha Jiming and Xing Ziqiang, economists at China International Capital Corp, said in a report.

The government could accelerate the approval of investment projects, relax curbs on property speculation and loosen its liquidity controls in addition to keeping interest rates and banks' required reserves unchanged, they said.

This also brings to mind the fact that China is leading in global exports and increasing their global marketshare/footprint in exports because they are priming the Keynesian pump with gasoline, and it is ready to explode. Blowing a bubble is not the same as sustainable organic growth, and you can argue the contra-points until you are blue in the face but when asset prices rise faster than incomes, cash flows and the macro-fundamental forces that support them, you are in a bubble - plain and simple. All bubbles pop. If they didn't, then they wouldn't call them bubbles, now would they?  See from March of this year and notice the share prices of those companies mentioned who are so heavily levered into the Chinese production bubble! Don't tell me ample money is not to be made shorting the Chinese export bubble!

Additional and relevant commentary on the bubble in China:

  1. It Doesn’t Take a Genius to Figure Out How This Will End
  2. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts
  3. HSBC is Performing as Expected
  4. Part 2 of the Mechel Overview is Available
  5. Some Light Shown on My Developing China Thesis
  6. Follow Up to the China Short Thesis Debate
  7. China’s Most Expensive Export: Price Inflation
  8. Believe Those China Growth Stories at Your Own Risk – Just Ask Google!
  9. He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest Spittle and Saliva Spray Upon Ye Face
  10. Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!
  11. All of my warnings about China are starting to look rather prescient
  12. Now that the world is forced to agree with Reggie on China’s growth propsects…

Relevant Macroeconomic and Fundamental Research Links:

Below are the full forensic reports available for download to subscribers (click here to subscribe):

icon HSBC 170610 Professional & Institutional (554.65 kB 2010-07-07 06:23:52)

icon HSBC 170610 Retail (388.56 kB 2010-07-07 06:22:25)

We have performed a decent amount of analysis on HSBC in the past as well, and it has served as a very profitable short position in 2008. I have decided to release the dated analysis to the public for free,  it is available by clicking here: icon HSBC_Holdings_Report_04August2008 – pro (138.89 kB 2008-11-06 10:11:09)

For anyone interested in the myriad risks and opportunities abound in the HSBC market’s macro environment, I strongly suggest you review our sovereign contagion models (subscribers only):

icon Sovereign Contagion Model – Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)

icon Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46)

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

foreign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I.          Summary of the methodology

  • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Tue, 20 Jul 2010 02:07:24 -0400
Will the Emerging Markets Lead the World to New Growth? http://boombustblog.com/blog/item/2413-will-the-emerging-markets-lead-the-world-to-new-growth http://boombustblog.com/blog/item/2413-will-the-emerging-markets-lead-the-world-to-new-growth

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...

Below are the full forensic reports available for download to subscribers (click here to subscribe):

icon HSBC 170610 Professional & Institutional (554.65 kB 2010-07-07 06:23:52)

icon HSBC 170610 Retail (388.56 kB 2010-07-07 06:22:25)

We have performed a decent amount of analysis on HSBC in the past as well, and it has served as a very profitable short position in 2008. I have decided to release the dated analysis to the public for free,  it is available by clicking here: icon HSBC_Holdings_Report_04August2008 - pro (138.89 kB 2008-11-06 10:11:09)

For anyone interested in the myriad risks and opportunities abound in the HSBC market's macro environment, I strongly suggest you review our sovereign contagion models (subscribers only):

icon Sovereign Contagion Model - Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)

icon Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be next in the contagion. We believe we can provide the road map, and to date we have been quite accurate. Most analysis looks at gross claims between countries, which of course can be very illuminating, but also tends to leave out many salient points and important risks/exposures.

foreign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I.          Summary of the methodology

  • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.
]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Wed, 07 Jul 2010 08:13:43 -0400
Aussi Bubble Video to Go With You Aussie Bubble Speculation? http://boombustblog.com/blog/item/2153-aussi-bubble-video-to-go-with-you-aussie-bubble-speculation http://boombustblog.com/blog/item/2153-aussi-bubble-video-to-go-with-you-aussie-bubble-speculation

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

]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Sat, 12 Jun 2010 07:16:00 -0400
Australia: The Land Down Under(water in mortgage debt), pt. Deux: Which Banks to Short? http://boombustblog.com/blog/item/2148-australia-the-land-down-underwater-in-mortgage-debt-pt-deux-which-banks-to-short http://boombustblog.com/blog/item/2148-australia-the-land-down-underwater-in-mortgage-debt-pt-deux-which-banks-to-short

As a follow-up to our piece on the Australian macro outlook (Australia: The Land Down Under(water in mortgage debt), 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

The average Texas ratio of the four Australian banks is 25% and average NPL coverage ratio ( NPL+90 days past due to allowance for loan losses) is 68%. While the NPLs and the past due loans of the Australian banks have increased over the last year, a major portion of the increase is coming from business loans and commercial property while the delinquency rates in residential mortgage in Australia have remained stable (except for Commonwealth bank where substantial increase has been seen in the past due loans in the housing sector). The reported delinquency rates for mortgage or housing loans in Australia for the four banks are summarized below.

  • Commonwealth bank of Australia – The total delinquent loans (1+ days past due) remained at 3.0% in 1H10, equal to the level of 3.0% in 1H09. However, owing to the aging of the some portion of the delinquent loans, the mortgage delinquency (90+ days) rate increased to 0.77% in 1H10 against 0.45% in 1H09 while the mortgage delinquency (30-80 days) rate remained stable at 0.86% and mortgage delinquency (less than 30 days) rate declined to 1.36% in 1H10 against 1.72% in 1H09.

The full analysis is available for download to subscribers below. Subscribers are also urged to review the Macro outlook document as well.

As excerpted from Australia: The Land Down Under(water in mortgage debt:

A few minutes ago, I posted an informational piece on Australia’s creeping protectionism in the form of taxing multi-national mining companies in ”In Australia, Tax as a Contagion“. This begs the questions, “Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?” Well, the answer most likely is because it is actually a ”Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!

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

]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Fri, 11 Jun 2010 08:00:11 -0400
Nonsense in the MSM and Some Common Sense to Counteract It, June 9th 2010 http://boombustblog.com/blog/item/2108-nonsense-in-the-msm-and-some-common-sense-to-counteract-it-june-9th-2010 http://boombustblog.com/blog/item/2108-nonsense-in-the-msm-and-some-common-sense-to-counteract-it-june-9th-2010
We've got a particularly heavy dose of BS in the mainstream news channel this morning. I believe it to be my duty to throw some facts amids this boiling cauldron of fiction, fantasy, propaganda, marketing and straight up lies. First up (yeah, you guessed it), those gosh darn Europeans...

June 9 (Bloomberg) -- France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”

In a joint two-page letter, French President Nicolas Sarkozy and German Chancellor Angela Merkel sought proposals from European Commission President Jose Manuel Barroso on a ban on so-called naked short sales of “certain” stock and bonds, as well as on naked credit-default swaps on sovereign bonds. They call for proposals to be ready by the middle of next month rather than October as had been planned.

The letter shapes a common position between the leaders of Europe’s two largest economies after Merkel last month caught other EU leaders off guard when she unilaterally banned naked sovereign credit-default-swaps within Germany. She argued the actions of “speculators” exacerbated the European debt crisis that has rattled markets and driven the euro to a four-year low.

“The return of strong volatility in the markets makes it necessary to question certain financial methods and certain products such as naked short-selling and credit default swaps,” the leaders said in the letter, e-mailed by their respective offices in Paris and Berlin today.

While Sarkozy made greater market regulation one of his main rallying cries since the start of the financial crisis, he has so far refused to follow Merkel’s lead and instead pushed for EU-wide measures.

Hey, here's a novel idea. Let's ban sovereign states from lying about financial condition and using swaps (you know, that same category of instruments you would like to ban investors from using) to manipulate your the perception of you liquidity and solvency! That will go a long way in quelling volatility and quashing those sharp downward leaps your securities may suffer from as we "speculators" pile in short positions, puts and swaps. Reference "Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!" as we query...

Let's place bans on Portugal before we ban investors and "so-called speculators"...

Like Italy (see below), Portugal has also been known for years to take advantage of derivatives contracts to dress up its budget numbers in the late 1990s. In a recent press article (Debt Deals Haunt Europe) Deutsche Bank’s spokesman Roland Weichert commented that the bank has executed currency swaps on behalf of Portugal between 1998 and 2003....

Let's place bans on France before we ban investors and "so-called speculators"...

In 1997, the French government received an upfront payment of £4.7 billion ($7.1 billion) for assuming the pension liabilities for France Telecom workers in return. This quick cash injection helped bring down France’s deficit, helping the country to meet the pre-condition to join the Euro zone. You may reference the pdf Laurent_Paul_and Christophe_Schalck_study for a background on the deal. I don’t necessarily concur with their conclusions, but it does provide some info

france_telecomm_transaction.png

Let's place bans on Greece before we ban investors and "so-called speculators"...

According to people familiar with the matter interviewed by China Securities Journal, Goldman Sachs Group Inc. did as many as 12 swaps for Greece from 1998 to 2001, while Credit Suisse was also involved with Athens, crafting a currency swap for Greece in the same time frame.

Under its “off-market” swap in 2001, Goldman agreed to convert yen and dollars into euros at an artificially favorable rate in the future. This helped Greece to use that “low favorable rate” when it recorded its debt in the European accounts-pushing down the country’s reported debt load.

Moreover, in exchange for the good deal on rates, Greece had to pay Goldman (the amount wasn’t revealed). And since the payment would count against Greece’s deficit, Goldman and Greece came up with another twist: Goldman effectively loaned Greece the money for the payment, and Greece repaid that loan over time. And the two sides structured the loan as another kind of swap. So, the deal didn’t add to Greece’s debt under EU rules. Consequently, Greece’s total debt as a percentage of GDP fell from 105.3% to 103.7%, and its 2001 deficit was reduced by a tenth of a percentage point in GDP terms, according to people close to Goldman.

Another action that smacks of Hellenic manipulation, at least to the staff of BoomBustBlog:  for years it apparently and simply omitted large portions of its military-equipment spending from its deficit calculations. Though, European regulators eventually prevailed on Greece to count everything and as a result, in 2004, there was a massive revision of Greek deficit figures from 2000 (a budget deficit of 2.0% of GDP in 2000 to beyond the 3% deficit limit in 2004), by then Greece had already gained entrance to the euro. As in my trying to prepare for the coming sovereign debt crisis, timing is everything, isn’t it???

Let's place bans on Italy before we ban investors and "so-called speculators"...

As discussed in a recent ZeroHedge article, a 1996 Italian currency swap, arranged by J.P. Morgan, allowed Italy to receive large payments upfront that helped keep its deficit in line, with the downside of greater payments later.

In addition, to curbing their current deficits, countries are now using these swap agreements to push off their loan liabilities (related to swap agreements) to a later date through securitization, and Greece is one such example.

Under the 2001 deal brokered by Goldman, Greece swapped dollar- and yen-denominated debt for Euros at below-market exchange rates. The result was that the country got paid €1 billion ($1.35 billion) upfront on the swap in exchange for an obligation to buy the swaps back later. In 2005, this obligation was in turn securitized as part of a 20-year debt issue, further pushing off the day of reckoning.

Moreover, one of the key reasons why such manipulations continued is the apparent ignorance of the EU’s Eurostat, which knew enough about these deals to tighten the rules governing their accounting-albeit only after they had served their purpose – the Ponzi! When Italy’s then-Prime Minister Romano Prodi miraculously achieved a four-percentage-point improvement in Italy’s budget deficit in time to usher the country into the common currency, Italy’s use of accounting gimmicks was widely discussed, and then promptly ignored. As at that time, everyone was only too eager to look the other way in the drive to get the single currency up and running.

It wasn’t until 2008-a decade after the deals became popular-that Eurostat was able to revise its rules to push countries to include swaps in their debt and deficit calculations. Still, till date too little is known about countries’ continued exposure to the deals that are already out there.

Overall, though there is less evidence to support that there are more such swap deals that happened during the late 90’s till early part of this decade, the data below showing a sharp decline in interest payments as a percentage of GDP particularly for Belgium (apart from Greece and Italy), hints that there are considerably more of these deals to be discovred. The questions is, will they be discovered before or after the respective sovereign issues record debt to the suckers sovereign fxed income investors.

euro_interest_payments__too_good_to_be_ture.png

Notice the extremely supercalifragilisticexpealidocious reductions Belgium, Greece and Italy have made in their interest payments from 1993 to 2000 in this graphic made pre-2000. If one didn’t know better, one would have thought theses countries actually used magic to make such reductions. Hell, Italy practicaly cut their debt service (projected, of course) in half. It really makes one wonder. I’m just saying…

According to DERIVATIVES AND PUBLIC DEBT MANAGEMENT by Gustavo Piga, “The political stakes of the 1997 budget package were enormous. Therefore, it was no surprise that many countries were accused of ‘creative window-dressing’ in their budget through the use of accounting tricks to reach the desired goal. One contentious item was interest expenditure, which is the interest expense that governments sustain to finance their deficit and roll over their debt. Interest expenditure represents a high percentage of public spending and GDP in the European Union. It is highly variable over time, especially when compared to other components of the budget. Because of its relevance and because it is subject only to minimal scrutiny during budget law discussions (and many times even after its realization during the fiscal year), interest expenditure is an ideal target for reaching fiscal stabilization goals without incurring excessive political protest or opposition”.

Elsewhere in the news...
  1. IMF Says Global Risks Are Rising, Policy Makers Have Limited Room to Act [Duhh!!]
  2. Bankers Challenging Rules in Vienna Find an Ally in Sovereign Debt Crisis [Hey, we'll admit we're not lending if you tighten our reigns as opposed to pretending we're lending when we're really not. Come on people, you don't need new regulation, you need proper enforcement of existing regulation. Make the rampant fraud a criminal offense that forces one to do time, and enforce it, and problems will cease in 30 days...Guaranteed]
  3. Greek Default Seen by Almost 75% in Poll Doubtful About Trichet Is my blog finally starting to get some circulation. Have you finally read Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!?
  4. Bernanke Says Unemployment Unlikely to Fall Quickly : Because we have not organically pulled out of recession yet. The government literally "PAID" for the GDP points printed, and they overpaid as well. Spendign $1 to get 75 cents of GDP print is not progress, nor the stuff jobs are made of.
  5. China Passing Growth Peak Insufficient to Tame Prices Is this what they are calling inflation nowadays?
  6. BofA Sells $212 Million Loan at Discount to Developers: WSJ Link Mumbai Plans to Hire Rat Killers as Rodents Surge: This is one way to lift employment! Should I introduce my Indian friends to the American Rat Terrier?
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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Wed, 09 Jun 2010 06:51:11 -0400
Must See Reality TV! http://boombustblog.com/blog/item/2054-must-see-reality-tv http://boombustblog.com/blog/item/2054-must-see-reality-tv
This is and interesting hour of reality TV for inflation hawks!
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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Thu, 03 Jun 2010 14:29:01 -0400
Quick Newscan for Tuesday, June 1st 2010 http://boombustblog.com/blog/item/2019-quick-newscan-for-tuesday-june-1st-2010 http://boombustblog.com/blog/item/2019-quick-newscan-for-tuesday-june-1st-2010

In the news this morning:

  1. Stocks, U.S. Futures Tumble on China Growth Concern, BP Spill; Oil Plunges: We discussed the topic of China's unsustainable growth and the knock on effects its slowdown would have on other economies in detail just last week. How timely...
    1. The Narrowing Chinese Trade Surplus
    2. In Australia, Tax as a Contagion
    3. Australia: The Land Down Under(water in mortgage debt)
    4. BoomBustBlog China Focus: Inflation?
    5. BoomBustBlog China Focus: Interest Rates
    6. My China Ruminations Have Come to Pass As the Country Enters a Bear Market
    7. Chubble (The Unmistakeable, Yet Thoroughly Argued Chinese Bubble), Unemployed/Deleveraging Shopaholics Pushing Retail Stocks & Other News
  2. Euro Weakens Against Dollar on Speculation Crisis Hurting Region's Economy: Nothing new here. BoomBustBlog newcomers, see the Pan-European Debt Crisis here.
  3. BP Tumbles Most in 18 Years After Abandoning Attempt to Plug Leaking Well: The company's future doesn't look to bright!
  4. Paulson Drops 6.9% as Hedge Funds Post Biggest Monthly Losses Since Lehman (HNWs and institutional investors should take the time to read this article and my summaries): Many funds, including Paulson's, made hard bullish bets on the financial sector recovering, in direct contravention to my positions and research. Yes, the financial sector took off like a bat out of hell the last 3 quarters of 2009, but one shouldn't confuse sharp market price movements with fundamentals. Many, if not most are in bad shape, and it ain't lookin' much better in the near term either. See The Next Step in the Bank Implosion Cycle???. Most importantly, many (if not most) professional money managers and analysts totally underestimated the extent of the damage being done Europe. I have was weary of Europe since 2008, put short research and positions on in 2009 (with mixed results due to the bear market rally) and went full blown GRIZZLY BEAR in 2010 (reference the Pan-European Debt Crisis which publicly documents and details it all). Back to the news clip:
    1. (Bloomberg) -- John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren’t as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier. Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased. “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”

    "SAC Capital Advisors LLC, the hedge-fund firm run by Steven Cohen in Stamford, Connecticut, with about $12 billion under management, lost 2.9 percent last month through May 21 with its SAC Capital International fund, trimming this year’s gain to about 4 percent, according to people familiar with the firm.

    Citadel Investment Group LLC, the $12 billion hedge-fund firm run by Ken Griffin, lost about 2 percent with its biggest funds last month through May 21, said people familiar with the Chicago firm. The funds soared as much as 62 percent last year as markets rebounded after losing as much as 55 percent in 2008.

    Brevan Howard Asset Management LLP in London, Europe’s largest hedge-fund firm, lost 0.1 percent for the month through May 21 with its Brevan Howard Fund Ltd., leaving it with a decline of 0.3 percent this year, according to an investor.

    1. I will gladly compare the performance of BoomBustBlog research to any bank, fund or asset manager that charges big commissions or 2 and 20! Reference Updated 2008 performance and the 2009 Year End Note to BoomBustBlog Readers and Subscribers for rough performance numbers covering 2007, 2008 and 2009.
  5. Analysts Boosting Forecasts See 25% Stock Gain Defying El-Erian New Normal: Yeah, but aren't analysts mostly wrong unless we're in  a bull  market? Stocks always go up, Right????!!!! Reference Blog vs Broker, Who Do You Trust?
  6. Cameron Bull Market in Gilts Beating Merkel Bonds as U.K. Keeps AAA Rating: For now, at least. Subscribers, see 
    File Icon UK Public Finances March 2010

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Tue, 01 Jun 2010 06:44:07 -0400
The Narrowing Chinese Trade Surplus http://boombustblog.com/blog/item/2002-the-narrowing-chinese-trade-surplus http://boombustblog.com/blog/item/2002-the-narrowing-chinese-trade-surplus

A particularly leveraged approach to playing bearishness in Chinese "uber-growth" is Australia's export, housing and banking sector. We have explained this linkage in In Australia, Tax as a Contagion and Australia: The Land Down Under(water in mortgage debt (paying subscribers should download the full document: Australia Macro Outlook (611.47 kB 2010-05-27 04:43:48). The following is a summary from sources around the web that lend credence to the thesis that import machine for China is slowing down. There is a version in Mandarin at the end of the post, as well as links to much of our recent Chinese research and opinion.

The Narrowing Chinese Trade Surplus

Though China eliminated the trade deficit recorded in March by recording a trade surplus in April 2010, the surplus has been narrower, weakening the pressure for appreciation. The rising price pressures caused by commodities demand could be countered by an increase in domestic currency purchasing power.

Chinese private consumption could not have created an annual trade deficit since it is not strong enough to reverse the trade surplus. The imports are still dominated by commodities and components for re-export, not by consumer goods for domestic demands.

The narrowing trade surplus has been caused by an increase in import prices, greater machinery and components imports, and slower growth in exports compared to recent years.

The slight decrease in commodity demand has not been enough to offset the increase in commodity prices, which may lead to more inflationary pressures.

Chinese export growth will be limited in the coming months due to sovereign debt worries and weaker consumption growth in U.S. and Europe.

The rise of the RMB against the USD will be gradual and expected to start happening during the second half of 2010.

The size of the China trade deficit in March was larger than the consensus prediction due to the higher cost of commodity imports and seasonality factors.

Some analysts believe that the 2010 China trade surplus should be larger than the 2009 one because in real terms China’s exports are growing faster than its imports and the global economy is recovering. I, personally, wouldn’t hold my breath on that one.

China beat Germany to become the world’s largest exporter in 2009.

The low-value-added processing trade has been discouraged by the Chinese government in 2008 but encouraged again after the financial crisis emerged.

y/y figures portray an accurate pictureduring normal times, but during fast-changing times they  may blur trends.

虽然中国在2010年四月消除了三月的贸易逆差,顺差缩小,减少人民币升值的压力。农矿产品需求引起的涨价压力可以被国内货币购买力的提升平衡。

中国私有消费水平不可能制造年度贸易逆差因为它达不到消除贸易顺差的水平。进口大部分还是有农矿产品和再出口的部件构成,不是提供给内需的消费性产品。

收窄的贸易顺差由进口价格的增长、更高的机械和部件进口、跟与今年相比放慢了的出口所产生。

工农产品需求的少量减少不足于抵消工农产品价格的提升,这个现象会引起更大的通胀压力。

中国出口增长在未来几个月会收限制于主权债务危机以及欧美减弱的消费水平增长。

人民币相对美元的汇率会逐渐增长,其间在2010年下半年。

中国三月份的贸易逆差大于共同预测,原因是更高的工农产品进口和季节影响。

有些分析师认为2010年中国贸易顺差会比2009年更大是因为宜实质计算中国的出口比进口增长得更快以及全球经济在恢复。

在2009年中国超越德国成为世界最大的出口国。

抵附加价值的加工业在2008年被中国政府阻碍,但金融风波以后重新鼓励。

与去年同期的数据在正常时期描绘一个精确的画面,但在风云变幻的非常时期这些数据可能会把趋势模糊化。

BoomBustBlog China-related links

Subscribers should reference the following related topics/documents:

Additional and relevant commentary on the bubble in China:

  1. It Doesn’t Take a Genius to Figure Out How This Will End
  2. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let’s Look at the Facts
  3. HSBC is Performing as Expected
  4. Part 2 of the Mechel Overview is Available
  5. Some Light Shown on My Developing China Thesis
  6. Follow Up to the China Short Thesis Debate
  7. China’s Most Expensive Export: Price Inflation
  8. Believe Those China Growth Stories at Your Own Risk – Just Ask Google!
  9. He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest Spittle and Saliva Spray Upon Ye Face
  10. Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!
  11. All of my warnings about China are starting to look rather prescient
  12. Now that the world is forced to agree with Reggie on China’s growth propsects…
]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Fri, 28 May 2010 05:55:47 -0400
Australia: The Land Down Under(water in mortgage debt) http://boombustblog.com/blog/item/1967-australia-the-land-down-underwater-in-mortgage-debt http://boombustblog.com/blog/item/1967-australia-the-land-down-underwater-in-mortgage-debt

A few minutes ago, I posted an informational piece on Australia's creeping protectionism in the form of taxing multi-national mining companies in "In Australia, Tax as a Contagion". This begs the questions, "Why is Australia So Tax Happy as to Potentially Chase Away Investment in the Down Under?" Well, the answer most likely is because it is actually a "Land Down Under(water in mortgage debt) and foreign export reliance. We, at the BoomBust feel that the government is actually attempting to take a proactive stance in meeting the consequences of what is probably going to befall most export reliant countries which is why Brazil and Chile are strongly considering following suit!

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

The Australian Department of Foreign Affairs and Trade reported an increase in Chinese exports of 31.2% from 2008 to 2009 in its latest summary on Australian trade, and more than 20% of total exports.  Within the top 25 national exports, iron ore, copper, and aluminum are the main industrial metals that make up a part of Australia’s commodity export based economy.  Of all these metals, China is the largest export destination for each one, particularly in the iron ore trade necessary for real estate development.  The growth in export production has caused Australia to run a trade surplus with China for the first time in the past five years.  As Chinese financial markets begin to slump along with industrial commodity prices, Australia should be the next domino to fall.  The Australian Bureau of Agricultural and Resource Economics (ABARE) has forecasted continued growth in commodity exports.  However, considering the dependence on China as shown in the following graphs, any sort of slowdown in Chinese demand will prevent export led growth.

image002

image004

image010

All of the data above is from the 2008 to 2009 fiscal year. While relatively useless in a vacuum, the data from 2007 to 2008 indicated incredible growth in Chinese copper and scrap/waste consumption.  It is reasonable to attribute the growth in industrial commodity consumption to measures taken by the Chinese government and central bank to stimulate economic growth and investment.  These measures have created a large Chinese bubble that Australia will be unable to insulate itself from unless it uses trade protection measures, inevitably destroying all “growth” made since the financial market led expansion began in March of 2009.  Don’t believe the hype about Australia avoiding the economic crisis of two years ago.  Instead, they were fortunate enough to see a major trade partner engage in an enormous attempt to spur investment and export production, and now that the Chinese are on the verge of private investment destruction, expect the Australian economy to get flushed down the toilet as well.

Of course, with the US in full print mode, spraying more ink on pulp than a 4 year old HP inkjet (those things never lasted more than 3 years for me), we have just the solution for export economies going down the crapper (pan right).

Please consider the following articles:

image012

image014


I recommend all paying subscribers download the full document (Australia Macro Outlook (611.47 kB 2010-05-27 04:43:48) to explore the direct linkages between nationalism, taxes, China, employment, housing bubbles, and what they mean for Australia and macro investment oppurtunities. We will probably be following up with specific company forensic analysis.

BoomBustBlog China-related links

Subscribers should reference the following related topics/documents:

Additional and relevant commentary on the bubble in China:

  1. It Doesn't Take a Genius to Figure Out How This Will End
  2. Can China Control the “Side-Effects” of its Stimulus-Led Growth? Let's Look at the Facts
  3. HSBC is Performing as Expected
  4. Part 2 of the Mechel Overview is Available
  5. Some Light Shown on My Developing China Thesis
  6. Follow Up to the China Short Thesis Debate
  7. China's Most Expensive Export: Price Inflation
  8. Believe Those China Growth Stories at Your Own Risk - Just Ask Google!
  9. He Who Bloweth the Bubble With Wet Lips Should Stand Back Lest Spittle and Saliva Spray Upon Ye Face
  10. Goldman Seems to Trust the Chinese Economic Reporting a Tad Bit More Than I Do!
  11. All of my warnings about China are starting to look rather prescient
  12. Now that the world is forced to agree with Reggie on China's growth propsects...
]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Thu, 27 May 2010 05:48:29 -0400
In Australia, Tax as a Contagion http://boombustblog.com/blog/item/1963-in-australia-tax-as-a-contagion http://boombustblog.com/blog/item/1963-in-australia-tax-as-a-contagion

From Blomberg: Mining Tax ‘Contagion’ Set to Spread From Australia:

May 20 (Bloomberg) -- Australia’s planned 40 percent tax on mining profits has set a benchmark for other countries weighing higher levies, reducing earnings forecasts for BHP Billiton Ltd. and Rio Tinto Group and the attraction of mining stocks.

“It could create what the miners are now describing at a global level as a type of tax contagion,” said Tom Price, commodities analyst with UBS AG in Sydney, in an interview. “They might levy a new tax at the miners in Brazil. Canada is another mineral province and South Africa.”

The new Australian mining tax coupled with rising worries over possible slowdown in China has become a serious concern for both domestic and international mining companies that have substantial exposure to Australian mining assets.

Here's a synopsis on the topic from my point of view...

Australian Mining Tax

The Australian government has planned a 40% tax on “super” profits (profits above the long-term government bond rate) of all mining companies. This new tax will be levied beginning July 2012, and would apply to all commodities covering both existing and new projects.

  • According to the government estimates, this new tax will generate estimated proceeds of A$9bn ($8.1bn) a year from 2013-14, and would be used to fund a cut in the company tax rate from 30% to 28%, higher pensions and infrastructure spending.

Impact on the Australian Economy

This new tax is expected to have an adverse impact on Australia’s economy as mining companies make up nearly 9% of the total economy and played a key role in saving the Australian economy from the global financial crisis.

  • Higher mining taxes will drive away investment and capital from Australia to lower tax countries like South Africa, Canada and China.
    • According to Citigroup, the tax rate on Australian mining companies is estimated at 58% (from the current 35%) after implementation of the super profit tax, while other major commodities exporters including South Africa, Canada and China tax mining companies at significantly lower rates of 33%, 23% and 30%, respectively.  Moreover, Canada’s Finance Minister Jim Flaherty has commented that he’s opposed to raising taxes, and the Australian levy makes Canadian companies more competitive.
  • Moreover, mining companies have warned that the new super profit tax would endanger $108 billion of planned investments in the country. All major mining companies have raised fears that the new tax will make mining in Australia uncompetitive:
    • According to BHP’s CEO Marius Kloppers, “The stability and competitiveness of the tax system have been central to the investment in resources in Australia, if implemented, these proposals seriously threaten Australia's competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians".
    • Rio Tinto’s managing director - Australian operations David Peever, has warned that a 40% Super profit tax, combined with corporation tax, "would make the Australian minerals sector the highest-taxed in the world, seriously eroding competitiveness".
    • Xstrata’s chief of Australian Operations Mick Davis, commented in a press article “the group’s Australian operations had generated revenues of A$44bn since 2002, but it had spent A$45bn in Australia on mining investment, royalties to state governments and taxes. The proposed tax will significantly impair the cash flows available to sustain our operations and has introduced great investment uncertainty".

Impact on the Global Mining Industry

This new super profit tax will adversely impact the profitability of both domestic and international mining companies that have substantial assets in Australia.

  • In addition to domestic resources companies, the new super profit tax will affect international miners including BHP Billiton, Rio Tinto, Xstrata and Peabody Energy which hold substantial assets in Australia. Many international energy groups including the UK’s BG Group, Petronas of Malaysia, Royal Dutch Shell, US’ ConocoPhillips and PetroChina could also be adversely impacted owing to their planned investments in the country’s liquefied natural gas sector.
  • On the new super profit tax, BHP’s CEO Marius Kloppers commented, “If implemented, the effective tax rate of the company will increase to 57% in 2013 from 43% today on the earnings in Australia”
  • Analysts have also raised concerns on profitability of major mining companies post the new tax implementation:
    • According to an April 2010 Merill Lynch report, BHP, the world’s largest mining company with 51% of its assets in Australia, may have a 19% decline in its earnings if the tax is implemented, while Rio Tinto, which is the second largest exporter of iron ore and has about one-third of its assets in Australia, could see earnings decline by 30%.
    • According to UBS, the new tax may reduce BHP’s earnings by 17% and Rio Tinto’s by 21% in 2013.
    • Citigroup has commented, “Gold and copper companies, which pay royalties of 3%, will be most affected, while coal producers, which pay about 6% to 8%, may suffer less”.
    • According to Auditing firm Deloitte, the super-profits tax would cost the Australian mining industry an additional $2.78 billion for 2012-13, the first year it takes effect and $8.34 billion for 2013-14.
    • According to Moody’s, “mining companies’ earnings may be cut by almost a third when the tax starts in 2012. The tax would be broadly credit negative for the sector and raise uncertainty for some companies over the short-to-medium term”.
  • Consequently, most mining companies have either shelved off, or have put their Australian mining projects including acquisitions on hold, till they get the final status on the proposed tax scheme.
    • After the super profit tax announcement, US coal giant Peabody Energy reduced its offer to buy Queensland based Macarthur Coal by $300 million, Xstrata PLC has suspended its copper exploration in Australia, and BHP Billiton and Rio Tinto has held its decisions on key expansion projects until the proposed tax scheme is finalized.

The uncertainty:

Despite analysts’ and industry’s warnings the Australian government stands firm on its Super profit tax announcement. This stance has been corroborated in the India Times and the China Post). The only hope left for the mining industry is that the current government either fails to join office when elections are held this year, or, if the government survives, it fails to have the majority in Australia’s upper house Senate to have its tax legislation passed into law.

Another mounting fear for the mining industry is that if Australia – a country known for its stable fiscal regime – adopts such a tax, other countries will follow suit.

  • According to Evy Hambro, manager of BlackRock Investment Management’s flagship World Mining Fund, “’Resource nationalism’ is a major risk facing miners in the next few years”.
    • Chile, the biggest copper exporter, is proposing a temporary rise in mining taxes to help pay for earthquake reconstruction that may cost BHP, Xstrata and Anglo American $1.2 billion over the next two years.
    • Brazil, the second-biggest iron ore exporter, is also thinking on taxing shipments of the commodity or increasing royalties

Overall, though it is sure that the new super profit tax if implemented will adversely impact the mining companies, its implementation and related technical details are still unclear, thus making it difficult to gauge the exact impact of the “Super profit tax”.


]]>
reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Thu, 27 May 2010 03:57:51 -0400
BoomBustBlog China Focus: Inflation? http://boombustblog.com/blog/item/1895-will-moderate-inflation-delay-monetary-tightening-in-china http://boombustblog.com/blog/item/1895-will-moderate-inflation-delay-monetary-tightening-in-china

Policy makers in China are likely to shift towards tightening with CPI inflation nearing 3% y/y. Inflationary pressures are induced by the sharp increase in money supply, higher food and housing prices, destructive weather patterns, and fuel and utility price liberalization. Inflation will be offset by industrial overcapacities, falling pork prices, and weaker wage growth.

China’s CPI increased by 2.8% y/y in April 2010, while producers prices increased by 6.8% y/y in April 2010. These statistics are not extremely inflationary and provides a time cushion for policy makers to implement monetary tightening measures.

The People’s Bank of China Q1 monetary report reiterated its commitment to maintain “appropriately loose” monetary conditions, but pointed out that inflationary pressures are not captured in stable CPI and PPI statistics.

Instead of fully withdrawing the current stimulus in China, the government may settle for stricter monitoring of wasteful projects and corruption due to an uncertain global macroeconomic outlook and export prospects.

The four main factors that determine y/y CPI growth in China include excess liquidity(defined as growth in M2 money supply subtracted by industrial growth), export, real estate prices, and share prices with a correlation of 0.36:0.13:0.22:0.04 to 1 unit of CPI growth.

The growing gap between M1 and M2 growth rates suggests that funds are being shifted from time deposits (interest rates capped at 2.25%) to demand accounts. This is driven by inflation expectations and will drive up inflationary pressure if the funds are spent.

Inflation rates tend to peak six months after money supply growth rates, and stronger-than-expected external demand could trigger overheating.

The high M2 growth rates are overblown because movements of households’ long-term savings moving between the stock market and deposits can affect M2’s growth rate and do not change the underlying purchasing power.

The great monetary expansion in China may contribute to asset bubbles, credit misallocation and bad loans if not controlled.

由于物价指数通胀跟去年同期比较接近3%,中国的决策者有可能走向政策收紧。通胀压力收促进于尖锐增长的货币供应、上涨的粮食跟房屋价格、毁灭性的气候规律、以及燃料跟公共事业价格的市场化。通胀会被限制于这些因素:工业多余容量、下降的猪肉价格、以及减弱的工资增长。

中国的消费者物价指数在2010年4月比去年同期增加了2.8%,生产商价格在2010年4月比去年同期增加了6.8%。这些统计不是特别具备通胀性质和为决策者执行货币紧缩措施前提供一个时间缓冲阶段。

中国人民银行在第一季度的货币报告重申了对“适当疏松”的货币环境,但指出通胀压力不能反映在消费者物价指数以及生产商物价指数等统计中。

由于不肯定的全球宏观经济以及出口行业的前途,中国政府可能会监控浪费的项目以及贪污,而不是完全抽取目前的经济刺激方案。

决定跟去年相比中国消费者指数增长四个主要因素包括多余的流通性(定义为M2货币增长减去工业增长)、出口业、房产价格、以及股市指数。他们的关连为0.36:0.13:0.22:0.04 对1 个单位的消费者物价指数增长。

M1跟M2增长率逐渐扩大的差距指出资金从定期存款(利息最多为2.25%)流到活期存款。这个是由通胀期望引起的现在会尽一步产生通胀压力。

通胀率通常在货币供应增长率到顶后6个月到顶。比预想要强大的境外需求会产生经济过热现象。

较高的M2增长率可以会被误解,因为家庭长远的存款资金会在股市与银行之间流动的现象会影响M2的增长率而不会改变本身的购买力。

中国的货币膨胀如果不控制的话可以会引起资产泡沫、信贷分配不当、以及坏账。

在春节后推迟动工的加工贸易行业导致的贸易逆差以后,采购经理指数提示加工业已经返回正常水平,把贸易平衡重新调到顺差。贸易顺差会收窄到1200 亿美元,跟去年相比下跌40%,原因是减弱的G-3国家需求。
零售销售额被收入增长以及大力的消费者信心支持,但可能被降温的房地产市场影响。中国2010消费水平被预测增长11%,但不够弥补G-3下滑的消费水 平。

Commentary on Relevant BoomBustBlog China Macro, Strategic, and Forensic Valuation Subscription Content


Thus far, our icon A Note On Potential Short Opportunity Opinions in China (475.18 kB 2010-01-21 01:13:06) has proven to be right on target. As excerpted from the first page of this report...

BoomBustBlog China macro report page 1

The FXI has rallied and broken trendlines on the downside since then.

fxi 5-19-10

Oct options since the trendline piercing would have been quite possible. As time progresses and we have more clarity in Europe, the timing of the China short should become more definable...

fxiaug20-10

icon BoomBustBlog Speculative China Industrial Short (366.23 kB 2010-02-26 18:32:58)

icon BoomBustBlog Speculative China Industrial Short Overview, pt2 (532.89 kB 2010-02-28 06:09:51)

As excerpted from page two of part 2 (be sure to read both parts, for the relation to China was not fully developed in the first part as its primary focus was excessive debt and contingent liabilities)...

BoomBustBlog China industrial short snippet

china short industrial

Oct. 22.5 puts on the same...

chimtl -5-19-10


The Contagion models below are a very, very unique method of tying in the Pan-European Sovereign Debt Crisis with what we see as the coming crash in China...

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

  • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

icon Sovereign Contagion Model - Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)

icon Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)

icon China Macro Discussion 2-4-10 (922.25 kB 2010-02-04 13:10:26)

icon An unbiased, independent retrospective comparative review - April 2009 (781.96 kB 2009-06-09 01:40:40)

icon Chinese ETFs with Exposure to Real Estate, Banks, Insurance and Export Industrials (377.96 kB 2010-01-22 02:27:03)

icon Asian ETF Spreadsheet (91 kB 2008-11-07 04:23:32)

icon Business Cycle Comparison (7.44 MB 2009-06-09 01:40:24)

icon Stagflation Data (3.02 MB 2009-06-17 04:00:11)

icon The Butterfly Effect - Paulson, Bernanke, the Asset Securitization Crisis & their impact on the Industrial and Manufacturing Sectors (5.9 MB 2009-06-09 01:38:50)

icon The Potential Effects of RMB appreciation on China's Economy (611.88 kB 2010-01-29 06:11:08)

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Thu, 20 May 2010 07:09:13 -0400
BoomBustBlog China Focus: Interest Rates http://boombustblog.com/blog/item/1869-boombustblog-china-focus-rate-hikes-off-for-another-month http://boombustblog.com/blog/item/1869-boombustblog-china-focus-rate-hikes-off-for-another-month

China’s economy continued to overheat in April despite substantial liquidity withdrawals, leading to expectations of further tightening measures.

Inflation continued to pick up during April because of rising feed costs, fuel costs, and housing prices, but the government pork purchases helped limit downward pressure on food prices and higher producer input costs being passed on to consumers.

There are signs of broad monetary tightening as the People’s Bank of China drained RMB437 billion of interbank liquidity through open-market operations, but China’s overall monetary policy remains excessively loose as April’s low CPI reading may delay an interest rate hike at least until June.

Strong output in manufacturing could keep industrial production above potential, which will eventually be inflationary.

The government announced tighter regulatory measures on the real estate sector on every other day for about a week in mid-April, and investment growth showed signs of slowing.

After a trade deficit in March caused by a slow restart of the processing trade after the Chinese New Year Holidays in late February, Purchasing Managers' Index (PMI) data suggests that the processing trade has returned to normal, shifting the trade balance back into surplus. The trade surplus is expected to narrow to US$120 billion for the year, down about 40% y/y due to weakening G-3 demand.

Retail sales have been supported by income growth and strong consumer confidence but may be affected by the cooling housing market. Even though Chinese consumption is expected to increase 11% in real terms in 2010, it will not be enough to make up for the drop in G-3 consumption.

即使在抽取流动资金以后,中国经济继续发展火热,可能导致更多收紧措施。

在四月份,由于喂养价格,燃料价格,房市价格提升,通胀继续严重化。但政府猪肉购买措施有助于控制食物价格以及防止更高的生产输入价格被传递给消费者。

从中国人民银行通过开放市场运作抽取4370亿人民币的银行之间流通资金,我可以看见一定程度上的货币收缩措施。但中国的整体货币政策还是过度疏松,四月份的低消费物价指数可以会把升息延迟到六月份。

生产业的强大输出可以使工业生产保持在潜力水平之上,最终产生更大的通胀压力

政府在一周内每隔一天向房地产行业宣布更严格的管制措施,导致投资增长露出放慢的迹象。

在春节后推迟动工的加工贸易行业导致的贸易逆差以后,采购经理指数提示加工业已经返回正常水平,把贸易平衡重新调到顺差。贸易顺差会收窄到1200亿美元,跟去年相比下跌40%,原因是减弱的G-3国家需求。
零售销售额被收入增长以及大力的消费者信心支持,但可能被降温的房地产市场影响。中国2010消费水平被预测增长11%,但不够弥补G-3下滑的消费水平。

Commentary on Relevant BoomBustBlog China Macro, Strategic, and Forensic Valuation Subscription Content


Thus far, our icon A Note On Potential Short Opportunity Opinions in China (475.18 kB 2010-01-21 01:13:06) has proven to be right on target. As excerpted from the first page of this report...

BoomBustBlog China macro report page 1

The FXI has rallied and broken trendlines on the downside since then.

fxi 5-19-10

Oct options since the trendline piercing would have been quite possible. As time progresses and we have more clarity in Europe, the timing of the China short should become more definable...

fxiaug20-10

icon BoomBustBlog Speculative China Industrial Short (366.23 kB 2010-02-26 18:32:58)

icon BoomBustBlog Speculative China Industrial Short Overview, pt2 (532.89 kB 2010-02-28 06:09:51)

As excerpted from page two of part 2 (be sure to read both parts, for the relation to China was not fully developed in the first part as its primary focus was excessive debt and contingent liabilities)...

BoomBustBlog China industrial short snippet

china short industrial

Oct. 22.5 puts on the same...

chimtl -5-19-10


The Contagion models below are a very, very unique method of tying in the Pan-European Sovereign Debt Crisis with what we see as the coming crash in China...

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

  • We have followed a bottom-up approach wherein we have first identified the countries/regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

icon Sovereign Contagion Model - Pro & Institutional (1003.48 kB 2010-05-04 12:30:48)

icon Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)

icon China Macro Discussion 2-4-10 (922.25 kB 2010-02-04 13:10:26)

icon An unbiased, independent retrospective comparative review - April 2009 (781.96 kB 2009-06-09 01:40:40)

icon Chinese ETFs with Exposure to Real Estate, Banks, Insurance and Export Industrials (377.96 kB 2010-01-22 02:27:03)

icon Asian ETF Spreadsheet (91 kB 2008-11-07 04:23:32)

icon Business Cycle Comparison (7.44 MB 2009-06-09 01:40:24)

icon Stagflation Data (3.02 MB 2009-06-17 04:00:11)

icon The Butterfly Effect - Paulson, Bernanke, the Asset Securitization Crisis & their impact on the Industrial and Manufacturing Sectors (5.9 MB 2009-06-09 01:38:50)

icon The Potential Effects of RMB appreciation on China's Economy (611.88 kB 2010-01-29 06:11:08)

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Thu, 20 May 2010 04:48:37 -0400
My China Ruminations Have Come to Pass As the Country Enters a Bear Market http://boombustblog.com/blog/item/1675-my-china-ruminations-have-come-to-pass http://boombustblog.com/blog/item/1675-my-china-ruminations-have-come-to-pass

From Bloomberg: China Inflation Accelerates as Loans Surge, Property Prices Rise by Record

May 11 (Bloomberg) -- China’s inflation accelerated, bank lending exceeded estimates and property prices jumped by a record, increasing pressure on the government to raise interest rates and let the currency appreciate.

Consumer prices rose 2.8 percent in April from a year earlier, the fastest pace in 18 months, and property prices jumped 12.8 percent, the statistics bureau said in statements today. New lending of 774 billion yuan ($113 billion), announced by the central bank, was more than any of 24 economists forecast.

Asian stocks fell, with the local benchmark index entering into a bear market, and oil and copper slumped on concern the government will move to cool the fastest-growing major economy. China should focus on preventing excessive increases in asset prices and liquidity after Europe’s almost $1 trillion loan package reduced the risk of another global slump, central bank adviser Li Daokui said yesterday.

“Price pressures have been building throughout the economy, strengthening the case for higher interest rates and a stronger yuan,” said Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. “China is at risk of overheating, with spot fires breaking out in various parts of the economy.”

Subscribers interested in this sector should have their positions intact by now. Those that do not and are interested in my opinion should know that I believe China has a way to go. The equity market drop signals an official bear market. Non-subscribers should reference:

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reggie@youcanreachmeatthisemail.com ( ) BoomBustBlog Tue, 11 May 2010 07:43:02 -0400