Here is another smattering of news from the weekend past, as well as our take on it and a decent dose of realistic analysis to cast a light on the real issues at hand...
Beijing Reports a Trade Deficit: BusinessWeek
- China reported its first trade deficit in over 70 months as the prices of raw materials imports climbed
- Analysts are stating that a stronger Yuan is needed to deter increasing domestic inflation
- China has the impossible task of balancing an ever increasing asset price bubble with US demands for a revalued Yuan in order to fuel President Obama's manufacturing jobs utopia
- Subscribers should reference China Macro Discussion 2-4-10 (Global Macro, Trades & Strategy)
And speaking of Beijing,,, China's Economic Growth Accelerates to 11.9%, May Prompt End of Yuan Peg - The Overheating has arrived???
Canadian Dollar Too Strong? Bloomberg.com:
- Minority opposition in Canadian Parliament is growing over strengthening Loonie
- Leaders fear fallout in exports from CAD nearly at parity with USD
- CAD strength is directly tied to Chinese commodity demand (is the CAD bubblicious, too?)
Relevant BoomBustBlog content (we gave you an explicit warning of this in early January): China's Most Expensive Export: Price Inflation
Ukraine is dangerously close to the brink http://www.bloomberg.com/apps/news?pid=20601095&sid=aNw4Q7ntlMqc
- Ukraine is about to use up the remainder of a $16.4 billion IMF loan
- Premier Mykola Arazov has applied for another loan to "reform the economy" (what the hell did they do with the first $16.4 billion?)
- Ukraine has needed assistance to make good with about 20 lenders
We have went through this in exquisite detail, both in the public sections of the blog and particularly in the subscriber-only content. See The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! Professional and institutional subscribers should carefully reference "Banks Exposed to CEE & SEE" while all paying subscribers should review the "Greek Banking Industry Tear Sheet".
This site (freebuck.com) came up in a Google search this morning, and it was just full of good cheer. Enjoy! In the future (if the guy is reading this), please link back to the blog).
2010 will also be challenging for G7 Sovereigns as they TRY to rollover inconceivable sums of existing debt while borrowing NEW money to pay for the WELFARE states’ spending. Trillions of dollars of borrowing challenges lie directly ahead; let’s look at some illustrations of the rollover requirements for Germany, France, Portugal, Ireland, Italy, Spain and Greece fromwww.newyorktimes.com and Reggie Middleton’s Boom Bust blog
These are just the rollover requirements for the United States and do not include NEW BORROWING of $1.6 TRILLION. So, a total of OVER $3.5 Trillion is required, providing that the deficits are as projected by the CBO (are they ever accurate?). That’s almost $300 Billion a month, or $10 Billion a day (10,000 million a day). Mind numbing numbers! Inconceivable sums. Now let’s look at European rollovers from Reggie Middleton:
Think of the US issuance and add this to it. Where will the money come from? The printing press in one form or another. That’s just the rollovers; now let’s look at NEW issuance to cover 2010 DEFICITS from www.forbes.com:
This is called INSANITY. Only India, China and the emerging world are growing in REAL terms, the rest of the borrowers are DEADBEAT welfare states with shrinking incomes and economies, when properly adjusted for inflation. How the US and Europe are going to navigate the rest of the year without some MISHAP is inconceivable. That will be the appearance of the “when HOPE to FEAR” moment we are looking for in 2010. This DOES not include BANK and brokerage debt (totaling OVER a trillion dollars) which must roll.
Well, the reason why it seems like China is growing in real terms is because they are blowing a BIG BUBBLE! It is not sustainable, and when it pops it will actually push them back some. See
I actually suggest you read the entire post, for although some of the charts and info are dated (the circumstances have changed somewhat) and other bits of info are anecdotal, it does give a good background of why anyone should be bearish - http://www.freebuck.com/articles/tandros/100326tandros.htm
I will start posting more news topics of interest and welcome readers to forward research and investment ideas at will. Here is the crop from last week. I will post topics from the weekend later on today, and as usual will randomly comment on daily news events.
From Alliance Bernstein:
- Core Intermediate Producer Prices have taken 6 months to rise 5.2% annualized, recession of 2002 took 2 years to reach same level
- Operating Rate hit low of 65.4% last year and has only risen to 69.4%, still short of historical threshold causing rise in raw material prices (74%)
- Increases in foreign operating rates have started to indicate US may now be a price follower instead of price leader
- The Fed cited lack of resource utilization as reasoning for maintaining record low rates, as these concerns begin to wane Alliance Bernstein sees easing of emergency Fed policy
- Christina Romer, Peter Orszag, and Tim Geithner have predicted unemployment will settle in 2010 at around 9.7%, citing poor job conditions
- Federal deficit projections for 2011 & 2015 are $1.5 trillion & $751 billion respectively, White House officials cite Bush's medicare and income tax cuts for allowing deficit insanity
Comments on global news from the weekend past...
- $7.88 billion of slices underwritten by Deutsche Bank under downgrade review since underlying CMBS have been downgraded (CDOs are MAX CMBS I Ltd. Series 2007-1 and Series 2008-1), S&P has already downgraded 2007-1 to BB+
- A BlackRock presentation stated that Deutsche Bank's CDO portfolio does not forecast for tranche losses
- The MAX CDOs are among the Federal Reserve's holdings in Maiden Lane III
- AIG provided Deutsche Bank with $5.61 billion in collateral before the Maiden Lane III transfer
FT Article: Merkel v. Greece Round 239,084.67 (Ding, ding) @ http://www.ft.com
- Merkel insists Greece has not asked for money, and Greece does not need any [Let's permanently attached this to Merkel's credibility rating]
- European Commission and IMF officials are far from same page as Merkel
- The article wasn't dense with info, which is not unusual considering the subject matter, but what is clear is that the bazooka everyone was talking about has no trigger, and probably loaded with more baby powder than gunpowder!
- That is going to be a big issue with Greek debt maturing in April if they have no revenue to pay it off
FT Article @ http://www.ft.com
- British Airway strikes did nothing to dampen travel plans over the weekend
- Examples like this are calling the union's bluff, they are not stopping society, potentially leaving room for union break ups by private companies, sovereigns and municipalities if they choose so, this could be a blip on the radar or an emerging trend, so something to continue to watch
Today in the news: China Inflation, Production Accelerate, Adding Pressure for Stimulus Exit
March 11 (Bloomberg) -- China’s inflation reached a 16- month high, industrial output climbed and new loans exceeded forecasts, adding to the case for the government to pare back stimulus measures.
Consumer prices rose 2.7 percent in February from a year earlier, the National Bureau of Statistics said in Beijing today, compared with the 2.5 percent median estimate of 29 economists surveyed by Bloomberg News. Seasonal factors stemming from a weeklong holiday may have boosted prices. Production rose 20.7 percent in the first two months of 2010, the most in more than five years.
Contrary to many, not only do I believe China is in the throws of a credit driven asset bubble, but its touted safeguards point the way to drastic correction.
China huge foreign reserves: Not a savior for the country if the asset bubble bursts
The concerns highlighted by Michael Pettis (a professor at Peking University's Guanghua School of Management, "Never short a country with $2 trillion in reserves?") are telling, particularly that huge foreign exchange reserves are not a sure shot solution for preventing China from a future financial crisis. I would like to amplify the message contained therein, since the news coming out of China reinforces the fact that it is really not "different this time" so emphatically.
The Author states:
"...Let us leave aside that the PBoC's reported reserves are a lot more than $2 trillion, and that if correctly accounted they would be pretty close to $3 trillion. China's foreign reserves are certainly huge. They add up to an amount equal to about 5-6 % of global gross domestic product.
But they are not unprecedented. Twice before in history a country has, under similar circumstances, run up foreign reserves of the same magnitude.
The first time occurred in the late 1920s when, after a decade of record-beating trade and capital account surpluses, the United States had accumulated what John Maynard Keynes worriedly described as "all the bullion in the world". At the time, total reserves accumulated by the US were more than 5-6% of global GDP...
The second time occurred in the late 1980s, when it was Japan's turn to combine huge trade surpluses, along with more moderate surpluses on the capital account, to accumulate a stockpile of foreign reserves only a little less than the equivalent of 5-6% of global GDP. By the late 1980s, Japan's accumulation of reserves drew the sort of same breathless description - much of it incorrect, of course - that China's does today.
Needless to say, and in sharp rebuttal to Friedman, both previous cases turned out badly for long investors and brilliantly for anyone dumb enough to have gone short. During the early years of the Great Depression of the 1930s, US stock markets lost more than 80 per cent of their value, real estate prices collapsed, and the US economy contracted in real terms by an astonishing 30-40 per cent before recovering in the 1940s.
Japan's subsequent experience was economically less violent in the short term, but even costlier over the long term. During the period following its astonishing accumulation of central bank reserves, its stock market also lost more than 80 per cent of its value, real estate prices collapsed, and economic growth was virtually non-existent for two decades.
Reserves of course are not useless as an enhancer of financial stability, but their use is for very specific forms of instability. Having large amounts of reserves relative to external claims protects countries from external debt crises and from currency crises."
The key term here is "external". China does not face an external debt concerns, as the country's foreign claim as per BIS (Bank for International Settlement) stood at only $278.6 billion at the end of September 2009 (which is only 5.3% of the country's 2010 expected GDP as per IMF). However, China's domestic debt currently remains at an uncomforting level (as we will see in our discussion below)
"The risks that China faces today (and the US in the late 1920s and Japan in the late 1980s) is of excessive domestic liquidity having fueled asset and capacity bubbles, the latter requiring the uninterrupted ability of foreign countries to absorb via large and growing trade deficits. These risks include an explosion in domestic government debt directly and contingently through the banking system... "
This risk is visible in the recent finance ministry announcement to nullify all guarantees local governments for loans taken by their financing vehicles, and its plan to issue rules banning all future guarantees by local governments.
If local government debt that China's local governments have been raising through off-balance sheet (and similar) investment vehicles to circumvent direct borrowing regulations - and which is not counted in official calculations, is included in the total debt - then the country's debt could rise to 39.838 trillion Yuan or $5.8 trillion. This puts China in similar debt standing with many of the PIIGS, being that its accounting for 96% of GDP, much higher in comparison to the IMF's estimate of 22% which excludes local-government liabilities, in 2010 based upon research by Northwestern University's Professor Victor Shih, who estimates China's local- government outstanding debt at the end of 2009 at 11.429 trillion Yuan.
This puts China 4th in line, behind Italy, Belgium and Greece in terms of gross debt to GDP!
"... And reserves are almost totally useless in protecting these economies from the risks they face (and, no, no, no, reserves cannot be used to recapitalize the banks - only domestic government borrowing or direct or hidden taxes on the household sector can be used to recapitalize the banks). In fact, it was the very process of generating massive reserves that created the risks which subsequently devastated the US and Japan. Both countries had accumulated reserves over a decade during which they experienced sharply undervalued currencies, rapid urbanization, and rapid growth in worker productivity (sound familiar?). These three factors led to large and rising trade surpluses which, when combined with capital inflows seeking advantage of the rapid economic growth, forced a too-quick expansion of domestic money and credit."
The above case is most accurate in regards to China, where the accumulated reserves have come from preventing Yuan appreciation, rapid urbanization and rising worker productivity (which remains one of the key drivers for the country's exports). Thus, if we go by historical precedence, a huge financial reserve for China does not safeguard the country against a financial crisis.
These similar concerns are being supported by other analysts and economists. Trend forecaster Gerald Celente believes that the depression is global and a contraction across the entire planet cannot be avoided, and that includes China.
Economist Harry Dent holds a similar view, recently saying that, "China will see their bubble collapse strongly when the U.S.-led stimulus program fails due to rising defaults and foreclosures later in 2010, at the same time that the world is looking for China to pull it out of this global downturn."
As suggested above by Michael Pettis, though foreign reserves can be used for very specific forms of instability, there is one way in which China can use its reserves to tackle the current problem of rising domestic debt, that is by converting its foreign currency denominated assets (which is primarily dollar for China) to Yuan.
However, this would lead to appreciation of Yuan against the USD. With China being an export-driven economy, this is a measure of very last resort.
But eventually, China will have to appreciate Yuan as it is facing considerable international pressure from its trading partners, more importantly, it looks like the only way to ease strains on the country's fast growing economy. We feel that this will not be a voluntary move (China faces new pressure to let currency rise).
Subscribers should reference the following related topics/documents:
Home grown credit risks look to come back home to roost. I am actually shocked the following development didn't get more traction in the mains stream media. The recent announcement by the Chinese finance ministry to nullify all guarantees for local governments for loans taken by their financing vehicles, and its plan to issue rules banning all future guarantees by local governments (see Bloomberg article), fuels (even further) our concerns about credit risks on such loans.
The primary concern is that most of these were non-recourse loans to provinces, municipalities and counties through shell companies, known as Urban Development Investment Corporations (UDIC). Some went to fund projects backed by assets, such as commercial real estate, others to projects with future cash flows such as subways and toll roads. Still others are social in nature and backed only by an implicit guarantee of the City/Provincial Investment Holding Corporation (CIHC).
This post should be taken in context of the discussion had regarding regarding the prospects of the highly levered Russian energy company. Subscribers please see Mechel (MTLR) 2010-02-26 18:32:58 366.23 Kb and
And the most concerning part of these loans primarily includes the estimated 3,000 billion Yuan ($450billion) of local infrastructure loans extended in 2009, which represents 30% of the record new bank lending last year.
- Most UDIC loans have sparse local equity and limited cash flow prospects for repayment. For 2009, local governments and CIHCs have been able to meet interest payment gaps with healthy land sales, which totaled 1,600 billion Yuan in 2009, as well as central government transfers.
- However, at the end of 2009, the UDIC liability is estimated at close to 6,000 billion Yuan or 14% of the outstanding loan base. And a 30% default rate could in effect wipe out the paid-in capital of top banks such as China Construction Bank and Bank of China.
According to Central bank governor Zhou Xiaochuan, during the National People's Congress, "while ‘many' local financing vehicles have the ability to repay, two types cause concern. One uses land as collateral, while the other can't fully repay borrowing", which means that for such loans the local governments may become liable, leading to ‘fiscal risks' for the government.
About a year and a half ago I warned that HSBC would be facing increasing and unanticipated (I was a contrarian on the China bubble) losses in Asia, as well as increasing losses on bad debt in the US. I believe I was one of the very few who threw this caution out there. I have included a free opinion along with the macro analysis to badk it up here: spreadsheet HSBC_Holdings_Report_04August2008 - retail and HSBC_Holdings_Report_04August2008 - pro 2008-11-06 10:11:09 138.89 Kb. As a refresher, the 2nd quarter 2008 review is available here: HSBC 1H 08 results update There is a discernable trend.
March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, posted full-year net income that missed analyst estimates after impairments for bad loans rose and profit in Asia fell.
I would like professional and institutional subscribers to know that they can always submit research requests. If we feel that there is some potential to the requests, we will follow up with custom research.
This idea, submitted by shaunsnoll, is developing into something worth looking into. See this asset manager's opinion at Seeking Alpha (http://seekingalpha.com/article/190073-high-conviction-a-russian-miner-leveraging-massive-china-demand) then download part one and part of our cursory overview and analysis. All may feel free to discuss this in the comments section below.