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Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

January 24, 2016

Why the Black Hole of Deflation Is Swallowing the Entire World … Even After Central Banks Have Pumped Trillions Into the Economy

Deflation Threatens to Swallow the World

Many high-powered people and institutions say that deflation is threatening much of the world’s economy …

China may export deflation to the rest of the world.

Japan is mired in deflation.

Economists are afraid that deflation will hit Hong Kong.

The Telegraph reported last week:

RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

***

Andrew Roberts, the bank’s research chief for European economics and rates, said that global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings.

The Independent notes:

Lower oil prices could push leading economies into deflation. Just look at the latest inflation rates – calculated before oil fell below $30 a barrel. In the UK and France, inflation is running at an almost invisible 0.2 per cent per annum; Germany is at 0.3 per cent and the US at 0.5 per cent.

Almost certainly these annual rates will soon fall below zero and so, at the very least, we shall be experiencing ‘technical’ deflation. Technical deflation is a short period of gently falling prices that does no harm. The real thing works like a doomsday machine and engenders a downward spiral that is difficult to stop and brings about a 1930s style slump.

Referring to the risk of deflation, two American central bankers indicated their worries last week. James Bullard, the head of the St Louis Federal Reserve, said falling inflation expectations were “worrisome”, while Charles Evans of the Chicago Fed, said the situation was “troubling”.

Deflation will likely nail Europe:

…click on the above link to read the rest of the article…

What Will China Dump Next, After Treasuries, to Keep Control?

January 12, 2016

What Will China Dump Next, After Treasuries, to Keep Control?

“Practically boundless” future capital outflows.

“Beneath all of the financial turbulence there lurks, in my view, a credit crisis; I fear the worst now,” UBS economic adviser George Magnus told Bloomberg TV today. The reform agenda “has stalled,” he said, and “things are looking much bleaker for China going forward.”

And so on Monday, we got another flavor of it.

The Shanghai Composite index plunged 5.3%, to 3016, down 15% so far this year. The Shenzhen Composite fell 6.6%. Hong Kong’s Hang Seng fell 2.8% to 19888, below 20000 for the first time since June 2013, and down 30% from its April high.

Everyone had hoped that China’s “National Team” would jump into the fray and bail everyone else out, but it didn’t. And the People’s Bank of China didn’t offer any big new remedies either. But it did stabilize the yuan after it had dropped 1.5% against the dollar last week, and about 6% since mid-August.

In Hong Kong, interbank yuan lending rates broke all records since the Treasury Markets Association started compiling the data in June 2013, with the overnight Hong Kong Interbank Offered Rate spiking 939 basis points to 13.4%.

And copper did it again, ratting on China’s real economy. Copper goes into anything from skyscrapers to smartphones. China is the world’s largest copper consumer, accounting for over 40% of global demand. And on Monday, copper dropped 2.6% to $1.97 per pound, the lowest level since May 2009.

Buffeted by, among other things, fears about slowing demand from the industrial sector in China, oil plunged – with WTI down 6.1% to $31.13 a barrel

To prop up the yuan and counter the impact of capital flight, China had dumped $510 billion of foreign exchange reserves last year, drawing them down to a three-year low of $3.33 trillion. And that was just the beginning.

…click on the above link to read the rest of the article…

Stock Markets All Over The World Crash As We Begin 2016

January 4, 2016

Stock Markets All Over The World Crash As We Begin 2016

The first trading day of 2016 was full of chaos and panic. It started in Asia where the Nikkei was down 582 points, Hong Kong was down 587 points, and Chinese markets experienced an emergency shutdown after the CSI 300 tumbled 7 percent. When European markets opened, the nightmare continued. The DAX was down 459 points, and European stocks overall had their worst start to a year ever. In the U.S., it looked like we were on course for a truly historic day as well. The Dow Jones Industrial Average was down 467 points at one stage, but some very mysterious late day buying activity helped trim the loss to just 276 points at the close of the market. The sudden market turmoil caught many by surprise, but it shouldn’t have. The truth is that a whole host of leading indicators have been telling us that this is exactly what should be happening. The global financial crisis that began in 2015 is now accelerating, and my regular readers already know precisely what is coming next.

The financial turmoil of the last 24 hours is making headlines all over the globe. It began last night in China. Very bad manufacturing data and another troubling devaluation of the yuan sent Chinese stocks tumbling to a degree that we have not seen since last August. In fact, the carnage would have probably been far, far worse if not for a new “circuit breaker” that China recently implemented. Once the CSI 300 was down 7 percent, trading was completely shut down for the rest of the day. The following comes from USA Today…

…click on the above link to read the rest of the article…

The Lull Before The Storm—–It’s Getting Narrow At The Top, Part 2

December 2, 2015

The Lull Before The Storm—–It’s Getting Narrow At The Top, Part 2

The danger lurking in the risk asset markets was succinctly captured by MarketWatch’s post on overnight action in Asia. The latter proved once again that the casino gamblers are incapable of recognizing the on-rushing train of global recession because they have become addicted to “stimulus” as a way of life:

Shares in Hong Kong led a rally across most of Asia Tuesday, on expectations for more stimulus from Chinese authorities, specifically in the property sector…….The gains follow fresh readings on China’s economy, which showed further signs of slowdown in manufacturing data released Tuesday (which) remains plagued by overcapacity, falling prices and weak demand. The dimming view casts doubt that the world’s second-largest economy can achieve its target growth of around 7% for the year. The central bank has cut interest rates six times since last November.

More stimulus from China? Now that’s a true absurdity—-not because the desperate suzerains of red capitalism in Beijing won’t try it, but because it can’t possibly enhance the earnings capacity of either Chinese companies or the international equities.

In fact, it is plain as day that China has reached “peak debt”. Additional borrowing there will not only prolong the Ponzi and thereby exacerbate the eventual crash, but won’t even do much in the short-run to brake the current downward economic spiral.

That’s because China is so saturated with debt that still lower interest rates or further reduction of bank reserve requirements would amount to pushing on an exceedingly limp credit string.

To wit, at the time of the 2008 crisis, China’s “official” GDP was about $5 trillion and its total public and private credit market debt was roughly $8 trillion. Since then, debt has soared to $30 trillion while GDP has purportedly doubled. But that’s only when you count the massive outlays for white elephants and malinvestments which get counted as fixed asset spending.

…click on the above link to read the rest of the article…

One Analyst Says China’s Banking Sector Is Sitting On A $3 Trillion Neutron Bomb

November 3, 2015

One Analyst Says China’s Banking Sector Is Sitting On A $3 Trillion Neutron Bomb

To be sure, we’ve long contended that official data on bad loans at Chinese banks is even less reliable than NBS GDP prints. Indeed, the lengths Beijing goes to in order to obscure the extent to which banks’ balance sheets are in peril is truly something to behold and much like the deficient deflator math which may be causing the country to habitually overstate GDP growth, it’s not even clear that China could report the real numbers if it wanted to.

We took an in-depth look at the problem in “How China’s Banks Hide Trillions In Credit Risk: Full Frontal”, and we’ve revisited the issue on a number of occasions noting in August that according to a transcript of an internal meeting of the China Banking Regulatory Commission, bad loans jumped CNY322.2 billion in H1 to CNY1.8 trillion, a 36% increase. Of course that’s just the tip of the iceberg. In other words, that comes from a government agency and although the scope of the increase sounds serious, it still translates into an NPL ratio of just 1.82%. Here’s a look at the “official” numbers (note that when one includes doubtful accounts, the ratio jumps to somewhere in the neighborhood of 3-4%):

Source: Fitch

There are any number of reasons why those figures don’t even come close to approximating reality. For instance, there’s Beijing’s habit of compelling banks to roll over bad loans, and then there’s China’s massive (and by “massive” we mean CNY17 trillion) wealth management product industry which, when coupled with some creative accounting, allows Chinese banks to hold some 40% of credit risk off balance sheet.

China Takes “10 Steps Back,” Slaps 20% Reserve Requirement On Currency Forwards

September 1, 2015

China Takes “10 Steps Back,” Slaps 20% Reserve Requirement On Currency Forwards

Overnight, China decided to take steps to reduce “macro financial risks.”

And by that they mean “do something quick to help ease pressure on the yuan” and by extension, on the PBoC’s rapidly depleting FX reserves.

To that end, starting October 15 banks will have to hold the equivalent of 20% of clients’ FX forward positions with the PBoC, where the money will sit, frozen, for a year, at 0% interest.

Obviously, that will drive up the cost of taking speculative positions which the PBoC hopes will help narrow the gap between onshore and offshore yuan and bring down volatility, although the degree to which this will help fill the CNY-CNH spread looks like an open question.

“It’s a move to ease the reduction in foreign-exchange reserves,” Tommy Ong, managing director for treasury and markets at DBS Bank Hong Kong, tells Bloomberg. “It will also remove lots of speculative trades that aim at short-term gains as the reserves have a minimum lock-up period of one year,” adds Stan Chart’s Becky Liu.

Here’s a bit of color from FX strategy desks via Bloomberg:

Andy Ji, Singapore-based currency strategist at CBA:
- This is typical FX control, as it limits the FX forward positions
- PBOC has intervened before in the forward market, but imposing the 20% limit on outstanding forward position will require less intervention effort
- Spread on CNY and CNH may not substantially narrow on this move alone, as global demand on dollar remains high and China economic grow remains slow
Fiona Lim, Singapore-based senior FX analyst at Maybank:
- This seems to be another move to discourage yuan forward selling and to lower yuan depreciation expectations
- Offshore-onshore yuan gap has been pretty persistent because of yuan depreciation expectations and officials want to narrow the gap
- Gap will be sustained as the economy continues to remain under pressure
  …click on the above link to read the rest of the article…

This Is What Global Currency War Looks Like: A Complete History Of Recent FX Interventions

August 11, 2015

This Is What Global Currency War Looks Like: A Complete History Of Recent FX Interventions

After the dramatic collapse in the SNB’s defense of the Swiss Franc peg to the Euro, there was a period of relative FX peace in which few if any central banks engaged in outright currency intervention (aside from the countless rate cuts so far in 2015 in response to the soaring strength of the USD, which has risen dramatically over the past year for all the wrong reasons). Then China last night reminded us what happens when in a centrally-planned world one or more markets take too great advantage of relative FX differentials, in this case Japan, whose Yen plunged from USDJPY 80 to 125, and the Euro, which tumbled from EURUSD 1.40 to just above parity.

Now, it’s China’s turn.

But as we pointed out before, FX interventions never take place in a vacuum, and especially during periods of rising dollar strength, when the entire FX world, and especially exporters and mercantilists, go berserk.

Furthermore as Stone McCarthy notes, “this is the sort of “international development” that the Fed will need to keep an eye on and assess as conditions align for the start of policy normalization.” The reason is simple: what China just did could make a rate hike impossible as multinational US corporations will be slammed with a double whammy of soaring dollar and sliding CNY, making US exports that much tougher. And as we won’t tire of repeating, the Fed can not print trade.

And just to help remind readers of what happens when the entire world engages in wholesale currency war, here is a complete list of all the recent FX interventions, courtesy of Stone McCarthy.

Summary of Recent FX Interventions:

The last period of any significant Fed interventions in foreign exchange markets was during 1994-1995 when the dollar reached all time lows against what were then the benchmark currencies of the Japanese yen and German deutsche mark, and the period of the Mexican Peso Crisis. After that, it was acting to defend the value of the yen and new-minted euro.

…click on the above link to read the rest of the article…

Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red

July 28, 2015

Futures Soar On Hope Central Planners Are Back In Control, China Rollercoaster Ends In The Red

For the first half an hour after China opened, things looked bleak: after opening down 5%, the Shanghai Composite staged a quick relief rally, then tumbled again. And then, just around 10pm Eastern, we saw acoordinated central bank intervention stepping in to give the flailing PBOC a helping hand, driven by the BOJ but also involving NY Fed members, that sent the USDJPY soaring which in turn dragged ES and most risk assets up with it. And while Shanghai did end up closing down -1.7%, with Shenzhen 2.2% lower at the close, the final outcome was far better than what could have been, with the result being that S&P futures have gone back to doing their thing, and have wiped out all of yesterday’s losses in the levitating, zero volume, overnight session which has long become a favorite setting for central banks buying E-Minis.

As Bloomberg’s Richard Breslow comments, the majority of Asian equity indexes finished with losses but on an upbeat note, helping most European markets to start with modest gains that have increased with the morning, thanks to the aforementioned domestic and global mood stabilization. S&P futures have been positive all day other than a brief dip negative at the worst of the day’s China levels. Chinese equities opened quite weak and were down another 5% before the authorities assured the market that speculation they would withdraw from market supportive measures was misguided. This began a rally of over 6% before a mid-afternoon swoon.

…click on the above link to read the rest of the article…

Will Greek “Hope” Offset “Limit Down” Contagion From The “Frozen” China Crash

July 8, 2015

Will Greek “Hope” Offset “Limit Down” Contagion From The “Frozen” China Crash

Today’s market battle will be between those (central banks) “hoping” that a Greek deal over the weekend is finallyimminent (which on one hand looks possible after a major backpeddling by Tsipras – who may never have wanted to win the Greferendum in the first place – yesterday in Brussels and today during his speech in the Euro Parliament, but on the other will be a nearly impossible sell to Greece as any deal terms will be far harsher than the deal offered by the Troika 2 weeks ago and will have no debt reduction), and those who finally noticed that the Chinese central planners have effectively lost control.

For those who may have missed the overnight fireworks, here are some more indicative Bloomberg headlines about China:

China’s Stocks Plunge as State Intervention Fails to Stop Rout
China Freezes Trading in 1,300 Companies as Stock Market Tumbles
China’s State-Owned Firms Ordered Not to Cut Share Holdings
China’s Market Rescue Makes Matters Worse as Prices Lose Meaning
China Ramps Up Policy Response as Panic Grips Stock Market

While pundits have been eager to downplay what is now a historic rout in Chinese risk assets, one that is matched by the depression of 2008 and which has sent the SHCOMP from up 60% for the year 3 weeks ago to barely green losing some 15 Greeces in market cap since mid-June…

… the same pundits to whom neither the oil crash nor a Grexit nor the imminent collapse in Q2 corporate revenues and GAAP EPS, or anything else matters, the reality is that the Chinese stock rout is very clearly starting to have contagion effects on the rest of the economy, crashing commodities such as crude, gold, copper, iron and virtually everything else where China has been a marginal source of demand, but leading to forced selling of anything that is not nailed down.

…click on the above link to read the rest of the article…

Short-Sighted Politicians Are Fuelling Canada’s Housing Crisis

May 31, 2015

Short-Sighted Politicians Are Fuelling Canada’s Housing Crisis

The latest example of Canadian politicians’ (in)action in regard to real estate prices getting out of control is the recent decision by the B.C. Premier Christy Clark, to reject the idea of raising taxes for overseas investors — despite a petition from her constituents that attracted some 25,000 signatures. “By moving foreign owners out of the market, housing prices will drop,” she reasoned, voicing her concern about the (possible) loss of present homeowners’ equity.

Many homeowners in Vancouver and Toronto have become “equity-millionaires” in the last few years due to unusually high appreciation of their homes thanks to persistently strong demand by foreign investors, mostly from China. In their haste to park their money overseas in a hurry, most of them don’t even bother to make a trip to view their investments. The Wall Street Journal article, “The Mechanics of Moving Cash Out of China,” reveals the clandestine, if not outright illegal ways that wealthy mainland Chinese are bringing their funds to Hong Kong, and from there on to other parts of the world. Most of it ends up invested in their favourite foreign destinations — the US, Australia, and Canada. It is a crime for any mainland Chinese to bring more than $50,000 out of the country, but many wealthy Chinese are, nonetheless, smuggling out billions.

Transfer of money from Hong Kong to Canada is legal, but no one is really paying attention to its origin. It seems that for the B.C. Premier, our Federal Finance Minister Joe Oliver, and our Prime Minister Stephen Harper, the influx of dubiously obtained money from China is of little concern. In fact, judging from their latest comments, they seem to be quite content with it. A CTV News report from May 14 quoted Prime Minister Harper as saying that limiting foreign investment in housing is not something he is “contemplating at the current time.”

…click on the above link to read the rest of the article…

Hong Kong’s Chief Executive Publicly Tells Citizens to “Act More Like Sheep”

February 19, 2015

Hong Kong’s Chief Executive Publicly Tells Citizens to “Act More Like Sheep”

Hong Kong’s unpopular chief executive has infuriated pro-democracy campaigners by using a Chinese New Year message to urge the former colony’s citizens to act more “like sheep”.

“In the coming year, I hope that all people in Hong Kong will take inspiration from the sheep’s character and pull together in an accommodating manner to work for Hong Kong’s future.”

In case his message had been missed, Mr Leung noted that the 12 animals in the Chinese zodiac had 12 individual “character types”. “Sheep are widely seen to be mild and gentle animals living peacefully in groups,” he said.

– From the Telegraph article: Hong Kong leader tells people to act like ‘sheep’

This is simply a spectacular admission from a clueless authoritarian. No wonder things are so volatile in Hong Kong with this clown in charge. Rather than quieting the mood, CY Leung’s comments are more likely to infuriate the island’s youth and strength their resolve. Not smart.

From the Telegraph:

…click on the above link to read the rest of the article…

Official Suspected of Biggest Financial Fraud in China’s History Investigated

February 9, 2015

Official Suspected of Biggest Financial Fraud in China’s History Investigated

The high-living nephew of a former Chinese communist leader is said to be in the crosshairs of the Party’s anti-corruption investigators, according to a number of reports in the Hong Kong press recently.

Hong Kong press reports are not always reliable, but often enough include details about affairs inside the Party that cannot be reported in the mainland for political reasons. Hong Kong publications are also used as ways for political factions in China to send messages to one another and the public.

Wu Zhiming is a high-level official in the southern city of Shanghai, long a power base of the faction of Jiang Zemin, who ruled the Communist Party from 1989 until 2002, and who then cast a shadow over Chinese politics for the next decade.

The reports say that Wu and Jiang’s eldest son, Jiang Mianheng, were together involved in a notorious financial scandal in 2007. The level of fraud involved reached a mind-boggling one trillion yuan (US $160 billion), the reports claimed.

Hong Kong’s Cheng Ming magazine reported on the matter in its latest monthly issue: Wu Zhiming, currently the chairman of the Shanghai Political Consultative Conference, is being investigated and unable to leave the country, the reports said.

…click on the above link to read the rest of the article…

Democracy or The Rule of Law – Ludwig von Mises Institute Canada

December 2, 2014

Democracy or The Rule of Law – Ludwig von Mises Institute Canada.

One of the most heated topics last month was the protest in Hong Kong, led by students who were later joined by other Hong Kong citizens. The main issue between the government and the protesters is the Chief Executive Election method for 2017. The Basic Law states that “the ultimate aim is the selection of the Chief Executive by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedures.” As of right now the Chief Executive was nominated by a committee of 1200 people, which is not via universal suffrage. Protesters are concerned that democracy and freedom in Hong Kong will be lost, and that their interests will not be represented.

This protest, otherwise known as the “umbrella revolution” by some media outlets, lead people to focus on the possible outcomes of these events, namely, to vote or not? However, voting (or democracy) is only one part of liberty, and the focus on change should include reforms of all institutions. The improvements of all these institutions will take time and great effort.

According to the 2014 Index of Economic Freedom, Hong Kong ranked no.1 with an overall score of 90.1 (The Heritage Foundation, 2014). This index consists of four major parts: the Rule of Law, Limited Government, Regulatory Efficiency, and Open Markets. According to the Heritage Foundation, Hong Kong scored its highest ever score this year. The lowest scores are Monetary freedom, under regulatory efficiency, which is 82; and Freedom from Corruption, under “Rule of Law”, which is 82.3.

…click on the above link to read the rest of the article…

Hong Kong police pepper spray protesters as hundreds try to surround govt office — RT News

December 1, 2014

Hong Kong police pepper spray protesters as hundreds try to surround govt office — RT News.

Hong Kong police have used pepper spray to prevent hundreds of protesters from encircling the government headquarters, as China’s special administrative region continues to be gripped by demonstrations which began two months ago.

Demonstrators chanting “Surround government headquarters” and “Open the road,” as well as “I want true democracy,” made their way into the city’s government neighborhood of Admiralty, where scuffles with police occurred.

Protesters with wooden shields and metal barricades charged police as officers warned them to retreat.

Many in the crowd carried umbrellas, which have become a symbol of Hong Kong’s pro-democracy push, due to providing protection from pepper spray. Others had surgical masks, hard hats, goggles, and construction-style eye protectors.

…click on the above link to read the rest of the article…

Hong Kong police arrest more than 100 people as scuffles break out; Mong Kok protest camp cleared – ABC News (Australian Broadcasting Corporation)

November 26, 2014

Hong Kong police arrest more than 100 people as scuffles break out; Mong Kok protest camp cleared – ABC News (Australian Broadcasting Corporation).

Police in Hong Kong have arrested more than 100 people, including two prominent student leaders, while breaking up a protest camp in the city’s Mong Kok district.

Fresh scuffles broke out as authorities moved into the area to clear the main body of one of the major pro-democracy protest sites.

Police wearing helmets and brandishing batons moved in to protect city workers as crowds surged forward to stop them tearing down barricades at the largest part of the Mong Kok site.

Protesters said the movement’s student leaders Joshua Wong and Lester Shum were arrested.

“If we lose here, we won’t lose our heart. We can go somewhere else [to occupy]. It doesn’t need to be here,” said Kelvin Ng, a 21-year-old protester.

…click on the above link to read the rest of the article…

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