"There is excessive debt everywhere and negative interest rates are dangerous... My number one fear? That’s the same as asking me where it will start. When you view the economy as a complex, adaptive system, like many other systems, one of the clear findings from the literature is that the trigger doesn’t matter; it’s the system that’s unstable. And I think our system is unstable... Central Bank models are just wrong"
Let me be blunt: this next crash will be far worse and more dramatic than any that has come before. Literally, the world has never seen anything like the situation we collectively find ourselves in today. The so-called Great Depression happened for purely monetary reasons. Before, during and after the Great Depression, abundant resources, spare capacity and willing workers existed in sufficient quantities to get things moving along smartly again once the financial system had been reset. This time there’s something different in the story line...
At a printing factory in the western city of Chongqing, a Reuters reporter was present when a local official visited last week to make sure the boss paid his workers before the Year of the Monkey begins. The official declined to speak with Reuters, although the boss later said it was an attempt to prevent unrest. "That's what the government is most fearful of," said the factory owner, who did not want to be named.
China's mid-tier banks are piling up exposure to the riskiest subset of borrowers at a time when economic fundamentals are deteriorating on a near daily basis. Meanwhile, this exposure is being carried on a line item that allows the banks to avoid provisioning for the losses that will almost certainly materialize in the not-so-distant future. At one bank, this one line item is larger than the entire Philippine banking system.
"If I don’t issue more loans, then my salary isn’t enough to repay the mortgage, and car loan. It’s not difficult to issue more loans, but lets say in a years time when the loan is due, if the borrower defaults, then I wont just see a pay cut, I’ll be fired, and still be responsible for loan recovery."
Last week, we noted that Italy is rushing to defuse a €200 billion time bomb in the country’s banking sector as investors fret over banks’ exposure to souring loans. On Wednesday we learn that Italy has indeed managed to strike a deal with Brussels to help alleviate banks’ NPL burden but the agreement falls well short of the type of comprehensive "solution" the market was hoping to see.
Total gross NPLs in Italy has increased by c160% since 2009 and now represents c18% of loans (vs c8% in 2009). Gross Sofferenze (eg the worst category of NPLs) are c60% of this or c€200bn. While new inflows of NPLs have decreased, there have been limited disposals, possibly due to pricing difference. Banks suffer in multiple ways due to the high stock of NPLs (profitability, capital, funding, lending, etc). The government implemented reforms last summer to improve recovery procedures (Government Proposes NPL Measures), but there is limited evidence so far of the benefit.
Liu Lang, a Chinese migrant worker, left his rural hometown in Sichuan Province two decades ago to work in the factories of the southern province of Guangdong, China’s manufacturing powerhouse. Now, he is moving back. “I worked my way up from a basic worker to a department head. And my career basically ended today,” Mr. Liu said on the train leaving Guangdong. Factories in Guangdong have been hit hard by the slowing economy, and many of them have closed, including the shoe factory where Mr. Liu worked.
Last night's Chinese data deluge can only be classified with one word: bad. So if bad news was again bad news as many claim, both commodities (read oil), and US equity futures should be tumbling right now... but just the opposite is happening and in fact both Brent and WTI have already jumped over $30 this morning. This happens even as the IEA said this morning that global oil markets could “drown in oversupply,” And yet this morning both commodities, global stocks and futures soaring? Simple: the following Bloomberg headline summarizes it: "Brent Rallies More Than $1 as China GDP Spurs Stimulus Bets," and where Brent goes, so goes risk, and the S&P.
"The new Portuguese administration is not the first government to resort to asset confiscation and populist expediency. Venezuela and Argentina also belong to this club. The important distinction is that Portugal is a eurozone member state, and its systemically important banks are regulated by the ECB."
... if analysts, like those at Autonomous are to be believed, China’s banks could require up to $7.7tn of new capital and funding over the next three years. State bailouts could send the government debt to GDP ratio spiralling from 22 per cent to 122 per cent. That kind of shock would be a challenge for any country, even one of China’s vast might.
Ming Pao, the most influential Chinese newspaper in Hong Kong, reports that Shanghai residents are lining up at local banks to sell Yuan for Dollars over fears of even more Yuan devaluation.
At this point, the longer China does nothing, the greater its problems will become. As such Beijing needs to choose: either collapse the economy in a deflationary wave, leading to a debt crisis and widespread social unrest, or devalue massively overnight in hopes of stimulating inflation, leading to collapsing profit margins, and even more widespread social unrest.In short, our condolences China: having decided to adopt Western neo-Keynesian economics, with the typical monetarist bent, you too are now trapped with no way out. But don't worry: so is everyone else. Good luck.
"... what we are going to see next is a credit cycle, and in a credit cycle you see some losses, but if China's banking system loses 10%, you are going to see them lose $3.5 trillion."
"The burn rate has been worrying. It’s not about how long it gets to zero, its about how long it gets to about 2, which is what they need."