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Weekly Commentary: State-Directed Credit Splurge

Weekly Commentary: State-Directed Credit Splurge

New data released Friday confirm ongoing historic Chinese Credit excess. Total Aggregate Financing increased (a ridiculous) $524 billion during August to $40.5 TN, doubling July’s growth and exceeding estimates by almost 40%. It was the strongest monthly gain since March’s record $759 billion. This pushed y-t-d (8-month) growth to $3.828 TN, up 45% from comparable 2019 ($2.650 TN) and 67% ahead of comparable 2018 ($2.297 TN) growth. It’s worth noting Aggregate Financing surged an incredible $2.960 TN over the past six months, 62% ahead of comparable 2019 ($1.823 TN). At 13.3%, year-over-year growth was the strongest in several years.
With 2020 GDP estimates in the 2.0 to 3.0% range, the divergence between Chinese Credit and economic output is unprecedented. That Credit growth has accelerated in the face of rapidly deteriorating economic prospects portends major troubles ahead. China’s “Terminal Phase” excess – including rapid acceleration of late-cycle loans of deteriorating quality – is unparalleled in terms of both degree and duration. Stoking a stock market mania while prolonging a historic apartment Bubble only exacerbates systemic fragility.

August New Bank Loans increased an above forecast $187 billion. This boosted y-t-d loan growth to $2.102 TN, 20% ahead of comparable 2019. Six-month growth ($1.481 TN) was 29% above comparable 2019. Bank Loans were up 13.0% over the past year, 27% in two years, and 84% over five years.

Consumer Loans rose $123 billion during August. Year-to-date growth of $755 billion was 4.7% ahead of comparable 2019. However, six-month Consumer Loan growth of $722 billion was 23% ahead of comparable 2019. Consumer Loans were up 14.5% year-over-year, 33% over two years, 58% in three and 135% over five years.

Corporate Bonds expanded $53 billion. This pushed year-to-date growth to $580 billion, up 80% from 2019 and 133% from comparable 2018 growth.

But the August winner of the Chinese Credit Sweepstakes goes to government finance. Government Bonds jumped $202 billion during the month to $6.362 TN, the largest monthly increase in a data series going back to 2017. At $837 billion, year-to-date growth was 59% ahead of comparable 2019. Government Bonds increased 18.7% over the past year, 38% in two and 66% over three years (5-yr data not available).

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

The anatomy of a financial crisis

In this blog, we present the anatomy of a financial crisis. A characteristic feature of a banking crisis is that it tends to follow, more-or-less, the same path regardless of the ‘shock’ or ‘trigger’ that initiates it.

The next phase of the crisis is likely to be a global financial crisis, as we have been anticipating for quite some time (see, e.g., Q-Review 4/2017). However, few understand what a financial crisis is, though it is probably among the most feared economic phenomena of mankind.

So, let’s dive in.

The initiation

If a banking system is sound and robust, it can usually withstand financial and economic shocks.

But a banking system may be fragile. Usually this is due to high leverage levels, where banks have either lent aggressively or carry risky financial investments on their balance sheets—usually both. Banks can also have a weak financial position, with chronically low profitability and insufficient reserves. As we have explained earlier, this is exactly the state the European banking sector finds itself in.

The onset of a financial crisis requires a trigger. The most common is a recession or the expectation of recession among consumers and investors.

Recession leads to diminished income and defaults by both corporations and households. This increases the share of non-performing loans in bank loan portfolios, reducing the value of loan collateral and increasing bank risks and capital needs. As write-downs and losses increase, mistrust among other banks and depositors and investors does as well. The bank’s share price will usually start to reflect this.

A ‘bank run’

If suspicion spreads, banks will be apprehensive about counterparty risk and will be unwilling to lend to one another even on an overnight basis.  If allowed to continue, this will have a calamitous impact on liquidity in money markets.

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

Today’s Contemplation: Collapse Cometh II

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Monte Alban, Mexico (1988) Photo by author.

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Money Supply Growth in May Again Surges to an All-Time High

MONEY SUPPLY GROWTH IN MAY AGAIN SURGES TO AN ALL-TIME HIGH

Money supply growth surged to another all-time high in May, following April’s all-time high that came in the wake of unprecedented quantitative easing, central bank asset purchases, and various stimulus packages.

The growth rate has never been higher, with the 1970s the only period that comes close. It was expected that money supply growth would surge in recent months. This usually happens in the wake of the early months of a recession or financial crisis. The magnitude of the growth rate, however, was unexpected.

During May 2020, year-over-year (YOY) growth in the money supply was at 29.8 percent. That’s up from April’s rate of 21.3 percent, and up from May 2019’s rate of 2.15 percent. Historically, this is a very large surge in growth both month over month and year over year. It is also quite a reversal from the trend that only just ended in August of last year, when growth rates were nearly bottoming out around 2 percent. In August, the growth rate hit a 120-month low, falling to the lowest growth rates we’d seen since 2007.

tms1.png

tms

The money supply metric used here—the “true” or Rothbard-Salerno money supply measure (TMS)—is the metric developed by Murray Rothbard and Joseph Salerno, and is designed to provide a better measure of money supply fluctuations than M2. The Mises Institute now offers regular updates on this metric and its growth. This measure of the money supply differs from M2 in that it includes Treasury deposits at the Fed (and excludes short-time deposits, traveler’s checks, and retail money funds).

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

China’s Central Bank Vows To Expand Total Credit By 30% Of GDP In 2020

China’s Central Bank Vows To Expand Total Credit By 30% Of GDP In 2020

One of the curiosities about the current global financial crisis is that unlike the global financial crisis of 2008 when a massive credit injection by China sparked a generous reflationary wave around the world which pulled it out of a deflationary slump, this time around China has been far more modest as the following chart shows.

All that may be about to change.

Speaking in a financial forum in Shangha, China’s central bank governor Yi Gang said that China will keep liquidity ample in the second half of the year, but it should consider in advance the timely withdrawal of policy measures aimed at countering the effects of the COVID-19 pandemic.

“The financial support during the epidemic response period is (being) phased, we should pay attention to the hangover of the policy,” Yi said. “We should consider the timely withdrawal of policy tools in advance.”

In other words, just like the Fed, China is pretending that whatever is coming will be temporary. Which, in a world of helicopter money will never again be the case.

But more importantly, we know that in order to boost its stagnating economy, China is about to unleash a historic credit injection: Yi said that new loans are likely to hit nearly 20 trillion yuan ($2.83 trillion) this year, up from a record 16.81 trillion yuan in 2019, and total social financing could increase by more than 30 trillion yuan ($4.2 trillion), or about 30% of GDP. A similar number for the US would be about $7 trillion which is more or less what the US deficit will be over the next 12 months.

In other words, we’re going to need a much bigger chart of China’s broad credit.

Yi added that the bank’s balance sheet remains stable around 36 trillion yuan.

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

Weekly Commentary: Global Bubbles are Deflating

Weekly Commentary: Global Bubbles are Deflating

“Bubble” is commonly understood to describe a divergence between overvalued market prices and underlying asset values. And while price anomalies are a typical consequence, they are generally not among the critical aspects of Bubbles. I’ll start with my basic definition: A Bubble is a self-reinforcing but inevitably unsustainable inflation.

Bubbles, at their core, are fueled by Credit – or “Credit inflation.” Asset inflation and speculative asset price Bubbles are a common upshot. At their core, Bubbles are mechanisms of wealth redistribution and destruction.

The more protracted the Bubble period, the greater the maladjustment to underlying financial and economic structures. And the longer the Bubble inflation, the greater the wealth disparities and underlying social and political strain. While Bubble-related inequalities reveal themselves more prominently later in the up-cycle, the scope of wealth destruction only becomes apparent as the Bubble finally succumbs. As Dr. Richebacher always stressed, there’s no cure for Bubbles other than not allowing them to inflate. The catastrophic policy failure over the past 20 years has been the determination to aggressively inflate out of post-Bubble stagnation.

Bubbles can have profound geopolitical impacts as well. The inflation of Bubbles and corresponding booming economies promote the view of an expanding global economic “pie”. The inflating Bubble phase is associated with cooperation, integration and solidarity. The backdrop shifts late in the Bubble phase, as inequities and maladjustment become more discernible. Bursting Bubbles mark a radical redrawing of the geopolitical landscape. The insecurities and animosities associated with a shrinking economic pie see a rise of nationalism and “strongman” leadership. The backdrop drifts toward fragmentation, disintegration and conflict.

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

Who’s Next to Fail in the Post-COVID World?

As much as I hate to invoke The Ayn Rand lest I give off the impression I’m some kind of Objectivist, which I am most certainly not, the engine of the world is coming to a halt.

Money velocity has been falling for years. It is now cratering as we hide in our homes from a bug that eventually we will all have to reconcile with. Credit is the engine of the world of today. 

It is the gas which fuels the engine of the world.

COVID-19 has cratered the global economy exposing the internal rot within our hyper-financialized global economy as nothing more than a pyramid of Ponzi schemes…

… piling credit on top of credit until there are no more greater fools to sell the new debt to.

That’s the system we have. And it is collapsing precisely because the world is situated at the point where there is little more productive capacity to monetize and pull that capital from the future to fund the new debt.

It won’t matter if we replace this system with pure helicopter money without debt as the Modern Monetary Theory proponents argue. We’re already doing a version of this by having the central banks buy debt they never intend to sell on the open market. So, the debt itself is without value. The money printed from those bonds is as much scrip as if the bond had never been issued.

But the time lost by people in pursuit of uneconomic ends by mispricing risk and servicing debt they are legally obligated to service is real.

The engine is sputtering as trillions are printed to kick it back over one more time. But the gas has too much ethanol in it. There’s not enough air. 

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

Coronavirus and credit – a perfect storm

Coronavirus and credit – a perfect storm 

This article posits that the spread of the coronavirus coincides with the downturn in the global credit cycle, with potentially catastrophic results. At the time of writing, analysts are still trying to get to grips with the virus’s economic impact and they commonly express the hope that after a month or two everything will return to normal. This seems too optimistic.

The credit crisis was already likely to be severe, given the combination of the end of a prolonged expansionary phase of the credit cycle and trade protectionism. These were the conditions that led to the Wall Street crash of 1929-32. Given similar credit cycle and trade dynamics today, the question to be resolved is how an overvaluation of bonds and equities coupled with escalating monetary inflation will play out.

This article sees worrying parallels with the collapse of John Law’s Mississippi scheme exactly 300 years ago. By tying in the purchasing power of his livres to the value of his Mississippi venture, Law ensured they both collapsed together in the space of only six months.

The similarities with our Keynesian experiment are too great to ignore. Could a simultaneous collapse of fiat currencies and financial assets happen again? If so both the money bubble and financial asset bubble could be fully deflated into worthlessness by this year’s end.

The epidemic

“Ring-a-ring o’ roses / A pocket full of posies / A-tishoo! A-tishoo! / We all fall down.”

Some folk attribute this old nursery rhyme to the plague in England of 1665. But it seems singularly appropriate for coronavirus or COVID-19, about which, as yet, we know little. Its origin is, allegedly, a mutation of a virus from a snake, bat or pangolin. Alternatively, one school of thought believes it escaped from a biological warfare laboratory in Hunan.

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

MacroView: The Next “Minsky Moment” Is Inevitable

MacroView: The Next “Minsky Moment” Is Inevitable

In 2007, I was at a conference where Paul McCulley, who was with PIMCO at the time, was discussing the idea of a “Minsky Moment.”  At that time, this idea fell on “deaf ears” as the markets, and economy, were in full swing.

However, it wasn’t too long before the 2008 “Financial Crisis” brought the “Minsky Moment” thesis to the forefront. What was revealed, of course, was the dangers of profligacy which resulted in the triggering of a wave of margin calls, a massive selloff in assets to cover debts, and higher default rates.

So, what exactly is a “Minskey Moment?”

Economist Hyman Minsky argued that the economic cycle is driven more by surges in the banking system, and in the supply of credit than by the relationship which is traditionally thought more important, between companies and workers in the labor market.

In other words, during periods of bullish speculation, if they last long enough, the excesses generated by reckless, speculative, activity will eventually lead to a crisis. Of course, the longer the speculation occurs, the more severe the crisis will be.

Hyman Minsky argued there is an inherent instability in financial markets. He postulated that an abnormally long bullish economic growth cycle would spur an asymmetric rise in market speculation which would eventually result in market instability and collapse. “Minsky Moment” crisis follows a prolonged period of bullish speculation which is also associated with high amounts of debt taken on by both retail and institutional investors.

One way to look at “leverage,” as it relates to the financial markets, is through “margin debt,” and in particular, the level of “free cash” investors have to deploy. In periods of “high speculation,” investors are likely to be levered (borrow money) to invest, which leaves them with “negative” cash balances.

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

China Central Bank Warns Downward Pressure On Economy Increasing

China Central Bank Warns Downward Pressure On Economy Increasing 

Several weeks ago, the People’s Bank of China (PBOC) said it would “increase counter-cyclical adjustments” to prevent downward pressure on the economy. Now the PBOC is warning that it might not be able to ward off these downward pressures in the short term, reported Reuters.

The PBOC’s annual financial stability report said China would continue to deploy fiscal and monetary policies to support the economy but warned economic deceleration would continue through year-end. 

Policy maneuvering by the PBOC will be limited as it will likely need to cut rates and the amount of money banks put down as reserves to promote credit growth.

The PBOC recognizes the rapid deterioration in the economy, along with the limitations of monetary policy to revive growth. 

There Is a Lot of Appetite for Chinese Bonds: Bank Julius Baer’s Matthews

Likely, credit creation via the PBOC won’t be in magnitude seen in the last ten years used to save the world from escaping several deflationary crashes. 

The government will likely stabilize its economy or at least create a softer landing through tax cuts and infrastructure spending, the annual report said. 

What this all means is that China’s economy isn’t going to save the world as it has done since 2008. China’s credit impulse has rolled over, the probabilities of a massive global economic rebound in the coming quarters are unlikely as China continues slow. 

Fathom Consulting’s China Momentum Indicator 2.0 (CMI 2.0) provides a more in-depth view of China’s economic deceleration through alternative data as there’s no evidence at the moment that would suggest a trough in China’s economy. 

China’s economy over the last decade has created 60% of all new global debt. This means with China’s economy in freefall, the PBOC powerless over downside, GDP will likely fall to the 5-handle in early 2020. More importantly, this means a global economic rebound of massive proportions is unlikely to happen early next year. 

Chinese Media Stunner: China Will Be The Next Country To Cut Rates To Zero

Chinese Media Stunner: China Will Be The Next Country To Cut Rates To Zero

One week ago, we showed in one chart why the global economic recovery that so many expect is just a few months away, won’t happen: as the chart below shows, China’s credit intensity since 1994 has exploded. This means that before the Global Financial Crisis, China needed on average one unit of credit to create one unit of GDP. Since 2008, 2½ units of credit are required to create one unit of GDP. In other words, that China needs much more credit than 10 years ago to have the exact same amount of GDP. Injecting more credit in the economy is not the miracle solution it used to be, and the disadvantages of credit push tend to surpass the advantages.

This explosion in China’s credit intensity in the past decade has directly fueled China’s debt engine, the same debt engine that single-handedly pulled the world out of a global depression in 2008/2009. Alas, this will not happen again: China’s public and household debts are at their highest historical levels, respectively at 51% of GDP and 53% of GDP, and the private sector debt service ratio is becoming a burden for many companies, reaching on average 19.7% This records an increase from 13% before the crisis. Overall, China’s debt to GDP is fast approaching an unprecedented 320%!

Which brings us to Saxo’s dour conclusion for all those who believe that the global economy is about to enjoy another period of sustainable growth (and has confused the Fed’s QE for economic resilience and fundamentals):

Contrary to previous periods of slowdown, notably in 2008-2010, 2012-2014 and in 2016, China is unlikely to save the global economy once again.

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

Is the Fed Secretly Bailing Out a Major Bank?

Is the Fed Secretly Bailing Out a Major Bank?

Prettifying Toxic Waste

The promise of something for nothing is always an enticing proposition. Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?

The yield-chasing hamster wheel… [PT]

Thus, smart fellows go after it; pursuing financial innovation with unyielding devotion.  The underlying philosophy, as we understand it, is that if risk is spread thin enough it magically disappears. In other words, the solution to pollution is dilution.

With this objective, new financial products are fabricated into existence. The risk free rewards of several extra basis points are then packaged up into debt instruments and sold off to pension funds and institutional investors. The search for yield demands it.

Yet as an economic expansion progresses, especially one that has been extended and distorted with the Fed’s cheap credit, these derived financial securities are polluted with more and more toxic waste. Spreading the risk ultimately pollutes the entire pool of liquidity.

At this moment in the business cycle, after a lengthy bull market in stocks and bonds, countless manifestations of the greater fool theory have bubbled up to the surface. Bonds with negative yields epitomize this. Buyers accept a guaranteed coupon loss with the hopes of scoring capital appreciation as yields fall. But when yields rise, it is game over.

German Bund futures contract, weekly. The recent blow-off and subsequent reversal illustrates the convexity effect on bond prices… [PT]

Of course, the greater fool theory extends much deeper and wider than negative yielding debt. It also extends to the polluted world of corporate debt…

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

China’s Credit Creation Unexpectedly Collapses At The Worst Possible Time

China’s Credit Creation Unexpectedly Collapses At The Worst Possible Time

Over the weekend, we observed that China’s slumping wholesale inflation, or PPI, which is so critical for corporate profits and sparking benign, demand-driven inflation in the economy, and which in October tumbled to a three year low assuring that Chinese dumping and exports of deflation will only further depress global reflation efforts…

… will not reverse until Beijing injects another elephant-dose of credit into the Chinese financial system.

Just 48 hours later we can confirm that there is zero risk of either a sharp spike in Chinese inflation, or of China flooding the financial system with cheap credit – as it has been known to do during key economic inflection points – because according to the PBOC, China’s credit growth slowed far more than expected in October to the weakest pace since at least 2017 as a continued collapse in shadow banking, weak corporate demand for credit and seasonal effects all signaled that efforts to prop up the economy through bank lending still aren’t working.

The central bank reported that Aggregate Financing, China’s revised version of the old Total Social Financing, was a paltry 618.9 billion yuan ($88 billion), missing the median conservative estimate of 950 billion yuan, and down a whopping 72% from the 2.27 trillion yuan in September and 737.4 billion yuan in the same month of 2018. Today’s print was the lowest in the revised series history which goes back to the start of 2017, and only a slightly lower print in the old series prevents today’s total credit injection from being the lowest since 2016!

New CNY loans of 661.3 billion yuan also missed the consensus print of 800 billion yuan, resulting in outstanding CNY loan growth of 11.9% annualized in October, well below the September 13.3% annualized print. As has been the case recently, two thirds of yuan-denominated bank loans were borrowed by households in the month, while the borrowing by non-financial companies was the least in amount since August 2016.

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

Global Debt Is Up To $188,000,000,000,000 – This Is Officially The Biggest Debt Bubble The World Has Ever Seen

Global Debt Is Up To $188,000,000,000,000 – This Is Officially The Biggest Debt Bubble The World Has Ever Seen

The world is now 188 trillion dollars in debt, and that number continues to grow rapidly each year. It is a form of enslavement that is deeply insidious, because most of those living on the planet do not even understand how the system works, and even if they did most of them would have absolutely no hope of ever getting free from it. The borrower is the servant of the lender, and the global financial system is designed to funnel as much wealth to the top 0.1% as possible. Of course throughout human history there has always been slavery, and the primary motivation for having slaves is to extract an economic benefit from those that are enslaved. And even though most of us don’t like to think of ourselves as “slaves” today, the truth is that the global elite are extracting more wealth from all of us than ever before. So much of our labor is going to make them wealthy, and yet most people don’t even realize what is happening.

Let’s start with a very simple example to help illustrate this.

When you go into credit card debt and you only make small payments each month, you can easily end up paying back more than double the amount of money that you originally borrowed.

So where does all that money go?

Well, of course it goes to the financial institution that you got your credit card from, and in turn that financial institution is owned by the global elite.

In essence, you willingly became a debt slave when you chose to go into credit card debt, and the hard work that it took to earn enough money to pay back that debt with interest ended up enriching others.

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

Global Economy Paralyzed In Low-Growth Trap As QE Can’t Ward Off Next Crisis

Global Economy Paralyzed In Low-Growth Trap As QE Can’t Ward Off Next Crisis 

The global economy is paralyzed, now stuck in a low-growth trap where conventional monetary policy by global central banks is less effective than ever before.

The world is on the brink of a global trade recession, week by week, economic data from Asia, Europe, and the US continues to decelerate into the late year. Despite central banks lowering interest rates and expanding balance sheets, nothing at the moment seems to be working to trough global growth.

Former governor of the Bank of England Mervyn King recognizes that the global economic slowdown is happening because monetary policy isn’t the answer, and argues that other innovative strategies have to be developed to rebalance the world economy.

“The Great Depression was followed by political upheaval and, in economics, an intellectual revolution. This time around, we’ve got the political turmoil but no comparable questioning of the ideas underpinning economic policy. That needs to change.

Modern policymakers operate in a world of radical uncertainty. They simply do not know what might happen next — and under these conditions, economic models need to be seen in a new light. The question isn’t whether the models are right or wrong, but whether they’re helpful or unhelpful. Today, the key features of standard models lead us astray in judging how to get the world economy out of its low-growth trap, and how to prepare for the next financial crisis,” King wrote in a recent Bloomberg Opionion peice.

Astonishingly, central bankers always wait until after they quit their job to drop truth bombs about how their destructive policies are leading to the next financial crash.

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

Olduvai IV: Courage
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Olduvai II: Exodus
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