Sean Corrigan Explains Why "This Cannot End Well"

Tyler Durden's picture

From Sean Corrigan Of Diapason Securities

This Cannot End Well

Markets were briefly cheered earlier in the week by news that the Chinese government was planning to relieve its banks of up to $450 bln in poorer quality local authority loans, hence removing a looming threat to the nation's credit-fuelled expansion.

As is usual with China, though, this was both something and nothing. Nothing because the announcement was only one of vague intent rather than a concrete proposal, much less one with a verifiable timetable. As is so often the case, the authorities may well be employing the typical ruse of benefiting from an initial headline effect and the subsequent goldfish memory capability of the vast majority of investors who only want to believe the best about the place, in any case.

Nothing, too, because the 'bail-out' will probably take the time-honoured form of simply re-labelling one form of irredeemable debt as a more prestigious marque—this time, perhaps, one with an MOF imprimatur on it—without altering the fact that it will remain as a low-interest drag on bank balance sheets in perpetuity.

Never mind, the banks can always shore up their balance sheets by selling another slice of overpriced equity to the biddable gweilo suckers who are so anxious to get a piece of the China-to-the-Moon action, even if they then cough up most of the proceeds by making over a series of dividends to their governmental majority shareholders with which these latter will meet the re-packaged junk interest payments.

If this seems a classic shell game of the kind so well described in Walter & Howie's 'Red Capitalism', there were also rather more disconcerting echoes of Frank Dikotter's 'Mao's Great Famine' in an official news story which attributed the calamity, that the recent drought in China has given way to a series of deadly floods, to the failure of the local cadres to arrange for the peasants to 'volunteer' to complete water management projects in the agricultural low season as they used to do in the 60s and 70s.

Given that the during the first of these alone— the risibly named Great Leap Forward— a near-unimaginable 45 million of those same peasants are reckoned to have been starved or beaten to death, the wistfulness with which this was recalled sheds a worrying light on the unsoftened callous which still passes for the heart of the central planner.

At root, of course, the bank lending splurge was a fiscal programme, not a commercial one: one which was inherently monetized and hence one which has lead straight to the inflationary problems of today.

Worse even than that, this New Deal was just as morally corrupting and societally enervating as have been all its less-than illustrious predecessors. In a one-party state, there may have been no need to 'Tax, tax, tax. Spend, spend, spend. Elect, elect, elect,' as Harry Hopkins categorized FDR's cynical exploitation of executive patronage in 1930s America, but the money will nonetheless have gone preferentially to the well-connected - the party loyalists, the SOE apparatchiks, and the princeling- run oligopolies—each eager to extend their fiefdoms as much as possible along the way.

Now that credit is being partly rationed, these, too, are the ones who will suffer last and least, meaning that genuine entrepreneurs are the ones who will have to bear the brunt of an adjustment process which has not only tightened funding and raised interest rates—especially the usurious curb rates which are often their only source of working capital and which some sources say are running at 5% a month—but which has crushed their export margins under the weight of the Yuan's ascent and the sharply raised the cost of both the labour and material inputs they require to stay in business.

Even the state mouthpiece, the Shanghai Times, admitted as much in running the results of a survey conducted by the All-China Federation of Industry and Commerce which said that SMEs across the 16 provinces canvassed were suffering a 'cash crunch' as tight as that experienced at the height of the LEH-AIG Crisis in 2008.

With the Western press full of stories of Chinese 'fraud caps' and with the signal, first ever failure of a domestic IPO this week to top a run of disappointing after-markets for a whole host of flotations, undeniable evidence of the deterioration in the economic environment may coincide with widespread investor distrust to provide a rather salutary end to this latest stage of the Sinomania.

Certainly, equities are beginning to look vulnerable, while the latest trade data shows that exports have been essentially static in Yuan terms for the past six months, with the YOY rate trending down even more sharply than in the run-up to the bust.

Apart from another round of anaemic import-export numbers (e.g., for copper, where we are already back to the stationary, 2001-08 mean), one portentous indicator is the volume of coal exports from Australia — and the corresponding length of the queue off the principal port of Newcastle— given that almost four-fifths of these are bound for either India or the China-Taiwan-Japan-Korea global production hub.

Another country getting little bang for its monetized buck is dear old Blighty— the UK— where well over 90% of gilt issuance has been taken up by the banks, stepping in for the rather more embarrassing direct money printing of the Old Lady herself conducted in 2009.

The author is old enough to remember how controversial was the proposal, mooted and then adopted during the previous housing crash, to insist no longer that, as an act of anti-inflationary prophylaxis, only government debt sold to non-monetary institutions and individuals would count as being 'funded' (admittedly, this was fast becoming a dead-letter with the rapid development of repo markets). We are along way from such days of virtue.

Here, again, we have a direct impediment to the necessary cleansing and re-ordering of society in that the feckless and unfortunate are preferentially receiving finance at the expense of the would-be phoenixes.

Is it any wonder that the country still runs a trade deficit of roughly £100 billion a year (a per capita equivalent of over $800 bln were the US to be as badly placed), despite the 20% decline in its currency (a real effective exchange rate decline which was the biggest undergone of the 57 nations the BIS tracks with the sole exception of benighted Iceland!)?

Is it any wonder that prices are rising so fast (despite the supposedly prohibitive Keynesian presence of an 'output gap') when so much of the money being created is not giving rise to goods and services, but is being used to furnish the means for the unproductive to maintain their soft budget lifestyle in all its £650 billion total, £120 billion deficit majesty?

But if Britain looks no further forward in clearing up the toxic legacy of RobespiBlaire and Culpability Brown (or Crash Gordon, if you prefer), who else will take up the challenge? The Europeans? What, with whatever political will which remains after failing to break the Greek impasse being squandered on the mindless rush to 'decarbonise' and to denuclearise the most successful economies on the Continent simultaneously?

It's not even that there is much of a Plan B, other than that of despoiling the environment, ruining the vistas, decimating the wildlife, and crippling both industrial and household budgets with vast, rent- sucking arrays of unwieldy, uneconomical and largely impractical windmills and solar panels.

As the Swiss environment minister, Doris Leuthard, so marvellously put it, when hailing the Bundesrat's decision to abandon the clean, quiet, low 'footprint' source of 38% of the country's electricity without having any obvious replacement to hand in a small, land-locked country where even shale gas exploration has met with overwhelming regulatory difficulties: 'I believe in a Switzerland of innovation.' Talk about the politics of the Tooth Fairy!

Even as it stands, there are just a few hints that some of the shine may be coming off the Mittelstand's gold stars. Export revenues— while still running at double digit rates— are seeing a progressively faster deceleration, with domestic sales picking up smartly in what may be a sign of the inflationary pressures bubbling up in this notoriously lacklustre sector.

Be aware, too, of the greatly elevated German business reliance on north Asia, whence it sends twice as many exports as in 2005, with their relative scale increasing by half from 22% of EZ exports then, to 35% today. If China sneezes... Gesundheit!

A glance at the chart of Dutch industrial production on the previous page may be telling us that this faltering of pace is proceeding there in a similar fashion and so presumably for similar reasons.

Looking further afield, Japan is not yet in any position to help and—besides—it, too, is now too intimately tied up with what happens on the Asian mainland to provide a separate driver, its tragedy being that it has replaced a dependence on one intemperate giant with a fate closely intertwined with the caprices of two.

As for the US, there is not too much new to say on the monthly data flow, with what there is of note being more long-term in nature, as the quarterly financial numbers show the maintenance of the split between the vitality of Corporate America and that of the rest of the private sector, as well as the contrast between the unretarded profligacy of the state and the ongoing resizing of the 'shadow' banking sector.

What we can also see is the scale of the distortions being introduced into the market where, despite the superficial health of both profits and cash flow (these a touch less impressive if we adjust for either of the US dollar's internal or external loss of value, one should constantly remind oneself), it is apparent that the balance sheet is still being strip-mined to salt the income statement and, more particularly, the per share ratios via debt-financed equity buybacks.

Even as this increases the overall fragility of the corporate structure, however, the Fed's egregious obliteration of capital market pricing signals has kept equities looking 'cheap' - with dividend yields anomalously above an artificially-depressed LIBOR and equity earnings yields at par with QE-shrunken corporate bond yields for the first time in almost three decades.

This cannot end well.

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I think I need to buy a gun's picture

cannot end well bitchez

SparkyvonBellagio's picture

Lehman / WaMu


Put on your radars and think about it.


TruthInSunshine's picture

I'd hate to see Obama being generous to  Wall Street...

Seriously...could they have had it any better?


Obama Seeks to Mend Fences and Win Back Wall St. Cash By NICHOLAS CONFESSORE 10:19 PM ET

President Obama has started an aggressive push to win back the allegiance of a vital source of campaign donations in 2008.



bigdumbnugly's picture

need bonzai or someone to put up a pic of Barry O stumbling around in a sailor's suit with a bottle of rum in one hand and throwing money to the four winds with the other.

ebworthen's picture


Goldman Sachs as #2 contributor to Obama's campaign, three TBTF banks, Morgan Stanley, UBS, couple of elitist Universities all in the top 12; how could Obama possibly be bought or in anyone's pocket?



Ned Zeppelin's picture


Why would the TBTF banks not support Obama. He has given them everything they want, carte blanche if you will.  He is their servant.  I think this is alot of noise over some other less obvious topic in the agenda havign to do with what comes next. 

takeaction's picture

Prepare is coming. 

These are the people that will be at your front door!

fiftybagger's picture

Walmart sells a lot of ammo too

buzzsaw99's picture

undeniable evidence of the deterioration in the economic environment may coincide with widespread investor distrust to provide a rather salutary end to this latest stage of the Sinomania...

emerging markets bitchez!

lawrence1's picture

Interesting analysis on China, suggesting they are in real trouble... and not likely to be a world saviour.  Always such conflicting, opposing views about China.  What´s happening with the Baltic Dry Index?  Im going to look at that now, but would welcome comments and interpretations of that.


lawrence1's picture

Quick research found charts showing the BDI falling against gold, oil and the continuous commodity index. An article suggests that the end of QE2 and the fact that the BDI is around its 2008 lows suggest the end of the commodity boom with the possible exception of gold and silver.  Look like a strong possiblity of a world wide recession to me but Im just a novice trying to understand and protect my meagre wealth.

zaknick's picture

The American and European middle classes are no kore. You can see on the charts just how closely China's exports track the banksters' housing bubble. Chinas boom was engineered by the banksters and there are no more factories to offshore. The deindustrialization of Amerika is complete.
Now comes the ugly part.

cosmictrainwreck's picture

I just love the ugly parts of the movie.... tell me more! My guess, as I've posted many times, is major Chinese implosion. There simply is nowhere any more to put all that silly shit they make. The Great American Consumer - engine of world prosperity - aside, seriously....where the fuck ya gonna put all that shit? Well, I guess the Great Leaders will make a way - always do. Get everybody out of the factories and have half dig holes & other half fill 'em in. Full employment. Listen up, O'bummer!

G-R-U-N-T's picture

I know plenty of places "to put all that silly shit they make". Get Creative. Up Al Gore's ass may be a start...


jeff montanye's picture

why you pickin on al?  he never even got to be prez.  how about the last two "poti"?

FlyPaper's picture

Let's see, hmmm, Al Gore.  

He created of the internet.  He sponsored of 'fancied up' global warming based on deliberately altered data.  He was hoping like hell to make a mint off the carbon tax; same Al who flies around in a corporate jet and gets to ride in a limo.... whilst preaching to others how they must reduce their carbon footprint whilst burning many multiples of other's carbon 'allocation.' 

Just because he's didn't get the Prez job doesn't mean he's not a "typical" politician with self-absorbed motives (thanks to tutelage under the Sith Lord Clinton).  

Maybe that's why the writer don't like ole Al ?

jeff montanye's picture

why you pickin on al?  he never even got to be prez.  how about the last two "poti"?

falak pema's picture

potties for ex-potis? They'll need it after he's finished with stuffing them full!

I can practically hear him "grunt".

akak's picture

Sean Corrigan, you are such a Debbie Downer --- I would much rather have breakfast with Leo, or even hang with RobotTrader in his low-rent, freeway-overlooking ghetto studio apartment!  Hell, throw in Methman, Spalding and Texas Shitslinger, and it would REALLY be a party --- we could start our very own ZH chapter of RA (Realists Anonymous).

Yen Cross's picture

  The Chinese can do what ever they want. It's a thing called DEBT SURPLUS. 


          The last time the US of A holes had it on paper was Slick Willys internut accounting in the late nineties.

jeff montanye's picture

be careful what you wish for.  the two prior countries/times where one nation had as much relative foreign exchange/debt surplus were the u.s. in 1929 and japan in 1989.  oops.

sagerxx's picture

All analysis of his analysis aside: holy crap, can this cat WRITE!

Re the analysis: this won't end well -- yah, I've known it since about five years ago. It pleases me not at all, but I'm ready.

Viva -- Sager

Yen Cross's picture

 ya smell like water and vinagar.

aminorex's picture

the profligacy of the state is so retarded.


Yen Cross's picture

 Pro- lifigate?


    Work smarter?

falak pema's picture

As the great Marlon Brando once said : when in doubt just clears the mind. Spoken like a true frustrated intellectual who was "labelled" Stanley Kowalski; and suffered from his double personality. Unfortunately, its a two way game when living with wives, not hookers, and it ended often in divorce for those who thought "practice makes perfect"...

I don't know why I'm telling you this...but who's done and said.

Seasmoke's picture

i understood this when i was 3YO and i read.....


Humpty Dumpty sat on a wall

Humpty Dumpty had a great fall

All the Kings horses and All the Kings men

Couldnt put Humpty Dumpty back together again

Yen Cross's picture

 Nersury Rymes (Nursery Rhymes).  Interesting?

Vampyroteuthis infernalis's picture

You can't have a prosperous society that prints money in forms of debt giving it to the lucky few who piss it away. This is true in the US, Europe and China.

Baptiste Say's picture

Let's hope that China isn't really "planning to relieve its banks of up to $450B".


Defaulted loans is what China does need. $250'000 homes in a land of $5000 incomes is not what China needs.


If some of the banks were to go bankrupt this would destroy a bunch of ones and zeros, it would not destroy the incredible manufacturing capacity of China and nor would it destroy the massive human capital and entrepreneurial spirit in the far east and a side effect would be commodity prices falling a huge amount.

Yen Cross's picture

 B/S it will be orderly. 5's and sevens will be next. Then 3's.

AgShaman's picture

Is it ok if I just read the comments on this one?

I've already had a few beers....and I'm such a lightweight these days

I promise to make a payment the article later.

Yen Cross's picture

  Quit drinking. Jet lag and Mind Set  work the best!

RobotTrader's picture

Risk Assets are rolling over in Asia again.

bankonzhongguo's picture

Well golly, with all those new FBI powers to just root around in anyone's business without rhyme, reason or cause, I'm sure all those banksters will be shaking in their boots to amend their ways.

Its official. 

Call the FBI the "Secret Police" from now on.

Hear and see that?

That's your country going down the drain.



Yen Cross's picture

  You are Multi Vowell.   Get it?  B- some thing?

ebworthen's picture


The lust of the greedy narcissists worldwide is setting up the rest of the world for a world war.


falak pema's picture

"The war of the buttons" ...great film.

oddjob's picture

 'greedy narcissists'

Like that asshole who continually posts pictures of himself with his articles on ZH.