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Stocks and Capital Flight - Old and New

Bruce Krasting's picture





 

 

In my time I’ve watched a bunch of countries go south. In the 80’s it was all of South America. Poland, Yugoslavia and South Africa also hit the skids during those years.

 

There was an observable pattern as events unfolded. The early stages of a crisis were always marked with capital outflow by the financial elite in the country. The wealthy families bought real estate properties outside of the country; they increased their ownership of foreign (mostly US) financial assets. They used whatever local currency they had (or could borrow) to buy hard assets in the country. In this case, hard assets meant companies (or farms) that produced stuff that could be exported, and thus be a source of hard currency earnings. Two minor examples:

 

- In Ecuador there was an explosion of shrimp farming. The expenses of production were all in Sucres (the local currency). The shrimp were sent to the US and sold for dollars. (This was a great business – ecological disaster however.)

 

In South Africa, it got so bad that people ended up buying luxury boats with their SA Rands, and just sailing away. A lot of the boats ended in the Caribbean. Many were sold for cash dollars.

 

 

I bring this old stuff up because I see definitive evidence (on a daily basis), that this is happening in China today. You name the City outside of China; I’ll show you the real estate transactions where it is Chinese money that is doing the buying.

 

 

Another observable phenomenon back then was in the local stock markets. When the local currency was rapidly devaluing, the only safe-haven trade was to move money into stocks. The stocks in favor during these times of crisis were the shares of companies that were exporters (source of hard currency). In Brazil it was the steel companies, in Argentina/Chile it was the food exporters, in Mexico the money went to the oil exporters.

 

We are witnessing precisely the same thing happening today in Japan. Japanese stocks are going up lock step with the falling Yen. So far, Japanese stocks have outperformed the currency devaluation. That is true for the citizens of Japan. It has is also been true for most foreign investors.

 

eurusd

 

usdjpy

 

 

China, today, is much different than Argentina was in the 80’s. But the level of capital flight by the wealthy from China should not go unnoticed. There is a big red flag being waved.

 

Japan is certainly no Mexico, who devalued its currency again and again. But the stock markets of the two countries, then and now, are also raising those Red Flags.

 

I’m always wary of looking at the past and using history as a guide for what will happen in the future. To the extent that the past is a guide, then we may be in for a rough spell, one that is not “homegrown”.

 

By my read of history, the “tipping point” occurs at about the time when the local stock market returns fall below the currency depreciation. When that balance is broken, chaos usually follows. In the case of Japan, this could come as a result of a sudden down correction in the Nikkei, coupled with another big move down in the Yen versus the Euro and the dollar.

 

As far as China is concerned, I think the cracks are already there. The growth in domestic debt is fueling the capital outflow. The “off balance sheet” financing for the capital outflow is coming from the sale of Wealth Management Products. This powder keg now totals $2 Trillion, and it’s growing fast. I think these investments are not unlike a ponzi scheme.

 

ponzi graffiti

 


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Thu, 01/31/2013 - 06:34 | Link to Comment newworldguy
newworldguy's picture

For US assets,  it is the Flow of Funds report  on the federal reserve site. Total assets ar approx 70 T vs 14 T in public Equity.  You can look at the breakdown in the FoF matrix.  This doesn't include off balance sheet stuff.

Thu, 01/31/2013 - 04:12 | Link to Comment ebworthen
ebworthen's picture

For a minute there Bruce, I was sure you were talking about capital & people fleeing the U.S.S.A.

Thu, 01/31/2013 - 02:37 | Link to Comment q99x2
q99x2's picture

Good posts and comments tonight.

Thu, 01/31/2013 - 08:16 | Link to Comment Orly
Orly's picture

This is our secret hide-out.  Please don't tell everybody.

:D

Wed, 01/30/2013 - 22:12 | Link to Comment chump666
chump666's picture

I know a Brazilian woman...,anyways, I love hearing her stories of hyperinflation in the early 1990's and their mad buying USDs, black markets and all.  Argentina is still doing it i.e 'blue' US dollars. http://www.buenosairesherald.com/article/122904/blue-dollar-hits-new-rec...$780

Now China has been going nuts with USD buying, which would indicate it's feeding into their black market USD/loan markets and/or offsetting inflation kicking in.  So outflows en masse plus debt binging...oh man, China will blow up, not implode.  Should take out the world.

 

Wed, 01/30/2013 - 22:34 | Link to Comment Orly
Orly's picture

That is some pillow-talk, Chump!

China's blow-up will not ruin the world, only those who have tied their wagon to that fading star.

I have contended all this while that it has been the plan of TPTB, central banks and the NWO (call it what you will...) to destroy China without having to kill a couple of billion people.  They won't do it with neutron bombs.  Rather, they will inflate such junk, like the global shadow economy is, and shove it down their gullet like so much honey-paste to a goose.

There is a plan for a post-Chinese meltdown, I am sure.  It prolly involves getting all of them credit cards.  :0

Comment dit-on "foie gras" en Chinoise?

:D

Wed, 01/30/2013 - 22:54 | Link to Comment chump666
chump666's picture

I know! And that is even before the Cachaça is busted out.  Purely professional relationship here, plus she is married...

You could be right about China and an economic war, the first thing is to inflate oil, China is a net importer as is Japan.  I think we will get war before that, my bet is that China/Japan will go at it first, maybe light, navel some aircraft skirmishes.  Israel will strike Iran at any given point, but Obama is holding them off, could give the green light in Feb, or March 

Did you get your GBP trade (bounce?)  Looks like some some further bids on the EUR, AUD, CAD.  So our stock rally may still have a little more to go.


Wed, 01/30/2013 - 23:03 | Link to Comment Orly
Orly's picture

I got the bounce.  But, as I said, it is quite lackluster and tentative.  I am watching for Cable to rise to the Fibo to about 1.586, which would signal the end of that uptrend, as well as the end of the uptrend in Euro for now.

That's the time to short the Edge (EURJPY...) like mad.  So far tonight, the yen pairs have been trading in a very tight range but the USDJPY looks to be shaking the tree a little as we speak.  If the UJ breaks trendline support, this could be the end of the stock rally and, thankfully, Abe's fat mouth- at least for a while.

Tokyo has bombarded the airwaves tonight with all kinds of bearish chatter for the yen, to no effect.  The yen could roll over and return, however briefly, to its status as a safe-haven currency and that would mean many, many pips to the downside.

:D

Thu, 01/31/2013 - 00:30 | Link to Comment willwork4food
willwork4food's picture

Damn, where were you guys when I felt impelled to lose a few thou on the FX years ago?

Thu, 01/31/2013 - 00:45 | Link to Comment Orly
Orly's picture

I was in hospital, recovering from my lobotomy.

Thu, 01/31/2013 - 06:47 | Link to Comment Stuntgirl
Stuntgirl's picture

Thanks for the FX heads up on trend change.

Wed, 01/30/2013 - 18:15 | Link to Comment DOT
DOT's picture

China

...waving a big red flag.   lol

Wed, 01/30/2013 - 17:20 | Link to Comment Dan Conway
Dan Conway's picture

The chi-com leaders will feel right at home here in socialistic amerika. 

Wed, 01/30/2013 - 17:17 | Link to Comment The Heart
Wed, 01/30/2013 - 21:07 | Link to Comment Orly
Orly's picture

With sixteen billion being agreed upon by the Chinese with Arab countries, Brasilians and others, it seems unlikely that China will become the world reserve currency any time soon.

Just drops in the bucket.

:D

Wed, 01/30/2013 - 17:13 | Link to Comment Longing for the...
Longing for the old America's picture

Much of the Real Estate sales in Vancover BC, Alaska and Hawaii are going to cash buyers from the Far East.

Corrupt money flees into hard assets demonimated in other than local currencies.

Lots of arab country money going into London RE as well.

 

Wed, 01/30/2013 - 21:07 | Link to Comment andrewp111
andrewp111's picture

I wonder. Which Arabs are doing the most buying? The big risk for Arabs is not currency depreciation, but instead  geopolitical shocks. Knowing who is running away the fastest might give a clue as to which regime is next to fall.

Wed, 01/30/2013 - 21:10 | Link to Comment Orly
Orly's picture

With the House of Saud rapidly running out of oil, my bet is they have their C-130 transports waiting for a moment's notice.

Courtesy Uncle Sugar, of course.

:D

Thu, 01/31/2013 - 00:37 | Link to Comment TruthInSunshine
TruthInSunshine's picture

There's a far more probabilistic chance than not that equity markets in the U.S. and European "Sovereign" Nations will follow, if not exactly, a very similar long term pattern that's has been taking place in Japan from 1989 onward in Japan (the Nikkei in particular).

The reasons?  We in the west have just begun to do precisely what Japan had started back then, in terms of monetization of deficits, massive debts, massive domestic spending programs in the form of shovel ready "doing things," and massive stimulus (ala Paul Krugman style) of many, other styles & forms.

I'd love to hear rebuttals as to how western equity markets don't suffer, at the very least, a somewhat similar long term performance, given the uncanny similarities between Japan's monetary policy (as well as fiscal policy) since '89, and what we in the west are now doing.

Thu, 01/31/2013 - 01:04 | Link to Comment Orly
Orly's picture

I agree completey with that idea.  The Nikkei average has fallen, in a roller-coaster fashion for years.

The only difference I can see and the only hope that we can avoid that never-ending disaster is to work our way out of it.  Fortunately for the US, there are vast natural resources and lots of space to work it in.

The problem with Japan is that they essentially live on a rock in the middle of the ocean, with no domestic oil and gas and no room to work with.  They have to import everything and hopefully export finer finished products.

If there were less regulation and lower taxes on entrepreneurs in the States, we could actually grow our way out of this mess, especially if we can refine techniques for natural gas usage.  If energy were essentially free, imagine how the economy would boom.

Hopefully, we'll get some young whippersnappers in office one day that are not beholden to the Carlysle Group and their ilk but I don't see that happening any time soon.

:/

Wed, 01/30/2013 - 16:43 | Link to Comment delivered
delivered's picture

USDs to Yen, Yen to Euros, Euros to USDs, Yen to USDs, USDs to Euros, Euros to Yen. And the game goes round and round and round again. Right now the winner (or loser if you are the ECB) is the Euro as the Yen continues its slide with the Nikki and the Japanese exporters gaining. Ben continued his job of keeping the USD in check so the poor Euro has suffered which I believe is now over 1.35 (USDs to purchase a Euro). Wasn't this ratio around 1.25 back in the 4th quarter with the Yen closer to 80 (versus 91 today)? But never fear as the ECB is now complaining about the strenght of the Euro and is "prepared" to act.

I can't recall a period of time when FX rates moved so quickly and violently as 10% exchange rate fluctuations over 90 day periods now seem to be the norm. I guess the only parties winning in this environment are the insiders or traders with ties to the CBs. What an absolutely crazy environment as it use to be that all of the action was in stocks/equity (so 90's), then derivatives (so 2007 - 2009), then debt (so last year), and now its FX. After this, what will they think of next to trade (maybe the over/under on when Lohan will next be in front of a judge or baseball's next PED scandal)?

But the real point of this article is well taken in that eventually, the flow of capital is going to explode into "real" and productive assets as currency debasements continue at a breakneck pace.

BTW and if anyone can refer me to the proper location, I would love to take a look at the following charts comparing the total amount or ratio of debt traded in public markets compared to equity over the past 30 years. And by debt, I mean all debt including corporate, public (federal, state, and muni), FX (as all currencies are infact a form of debt), and derivates (which are basically a form of debt as well). I can't even imagine what this analysis would look like as the leverage in the system must be completely off the charts. Just no room for error now as even the slightest hiccup, speedbump, or pothole will create the most severe of reactions.

 

Wed, 01/30/2013 - 21:15 | Link to Comment Orly
Orly's picture

The Japanese real money have been using the strength in the yen to purchase or merge many foreign assets these last few years.  They were about to buy Sprint before the DoJ put a hold on the transaction last week.

Kyle Bass says that this is a major sign, as illustrated so well by Bruce, that these are the end days for the Japanese regime as it exists today.

:D

Thu, 01/31/2013 - 03:11 | Link to Comment ReactionToClose...
ReactionToClosedMinds's picture

lot of good posts here tonight .... good stuff all around .... deeper into the wave patterns .... thanks all

Wed, 01/30/2013 - 16:21 | Link to Comment centerline
centerline's picture

Nice picture.  The word "ponzi" being exposed to the light of day.

Wed, 01/30/2013 - 21:30 | Link to Comment El Hosel
El Hosel's picture

Yeah, young gangbangers can see the Ponzi.... My inlaws  and most peers see "the Market" pricing in a recovery. What time does Cougar Town come on?

Wed, 01/30/2013 - 16:11 | Link to Comment sampo
sampo's picture

Bruce, can you elaborte on this with China's plans to aspire the reserve currency status?

Wed, 01/30/2013 - 22:59 | Link to Comment Bruce Krasting
Bruce Krasting's picture

China is sitting on $3T of foreign reserves. With this much money in the bank China should be a reserve currency.

 

I see China's growth falling well below 7%. I see the capital outflow continuing. So this is setting up to be a hiccup. Maybe a big hiccup - who knows?

 

But in the end, China is going to be the big guy on the block. Something like a blowup in the wealth management money could set that timetable back a few years. But this train has left the station, and there is no stopping it.

Wed, 01/30/2013 - 16:09 | Link to Comment dunce
dunce's picture

China is producing many millionaires and billionaires who are very family orientated. They are not foolish enough to put all their money on things that depend on their govt. to sustain them for generations. They are hedging their bets by buying hard assets around the world, not to flip, but as a ticket to ride for their progeny. What smart parent will leave his children a govt. IOU as the only thing in his will? Paper assets are only as good as the local govt. allows them to be and what govt. in today's world can you trust to preserve your hard earned wealth? Spell check just made me add an apostrophe to "todays" to show possession. Strange that a unit of time possesses the world. Or is it?

Wed, 01/30/2013 - 16:03 | Link to Comment Mercury
Mercury's picture

China, today, is much different than Argentina was in the 80’s. But the level of capital flight by the wealthy from China should not go unnoticed. There is a big red flag being waved.

How can you tell what portion of that capital flight is simply money leaving China simply because it can? 

I would imagine that many wealthy Chinese now want to buy stuff outside of China even if they have every confidence in their home country's economic and financial system because that's where the good stuff is. Pardon my unseemly cultural chauvinism but beyond a certain amount of creature comforts and toys, what else is there worth buying in China that is of greater value than what you can get outside of China?

I know that officially Chinese individuals are restricted to $50k/yr that they can move out of the country (although in reality many are able to get away with much more than that)  but wasn't it basically zero not too long ago?

Wed, 01/30/2013 - 23:11 | Link to Comment Son of Loki
Son of Loki's picture

Makes you wonder how gubbermint workers there "officially" make $800 per month..yet they own 20-30 apartments in Beijing and Shanghai worth $200k to $800k a piece? I read that most of ht eapartment sin HK now are owned by......(drumroll...) gubbermint officals from the PRC.  Local HK worker bees are priced out of the market (and pissed) from what I read.

Wed, 01/30/2013 - 16:32 | Link to Comment JeffB
JeffB's picture

On the other hand, the Chinese government itself has been stocking up on gold, steel, oil and other hard assets and has even encouraged its citizens to purchase gold.

They've alse embarked on a program of buying up oil companies, battery companies and other strategic and technological companies and assets.

They've also been rather outspoken in criticizing the U.S. monetary policy as being inflationary and given that they peg the Renminbi to the dollar, no wonder they've been actively working with others to find alternatives to the dollar as a reserve currency.

 

 

Wed, 01/30/2013 - 21:35 | Link to Comment Orly
Orly's picture

"...no wonder they've been actively working with others to find alternatives to the dollar as a reserve currency."

I wish I could get people to understand just how huge an undertaking that is, especially in light that no country really wants that status.  Can you imagine every tiny country tying their currency movement to yours and how that would certainly crimp your competitive advantage?

It is amazing to me how people would believe that China, smog and all, could garner the kinds of funds necessary to do that, after years of being small fry and tying their currency to the US Dollar.

It's not like the mob, where some John Gotti can overthrow the boss after years of kissing his butt.  It just doesn't happen that way.

:D

Thu, 01/31/2013 - 00:04 | Link to Comment JeffB
JeffB's picture

China has it's own problems for sure, and there are no obvious powers in the wings that would stand a shot at taking over the reings, but it doesn't necessarily have to be some other country's fiat currency either.

Some countries are bypassing converting each other's currencies into dollars and are dealing with each other directly. Iran is using gold as currency again with a few of its trading partners. True, that is primarily because of US sanctions but those types of transactions are a possibility as well.

At the moment those transactions are a trickle in the grand scheme of things and yet multiple countries have expressed much concern about US monetary policies and are trying to explore other options and are experimenting a bit. Even the IMF has been floating trial baloons on behalf of some of the members with respect to pooling currencies &/or PMs and having the IMF manage a world currency. Turbo Timmie even signed off on the idea.

I guess we'll see, but the way things are going other countries may be forced to find other alternatives. If "the full faith and credit" of the U.S. becomes relatively worthless and people lose faith in the stability and value of the dollar all bets could be off. People will be forced to jump a sinking ship whether they're ready or not, and the more that jump the faster the dollar loses whatever remaining credibility it may have.

At least that's how I see it.

 

 

Thu, 01/31/2013 - 01:13 | Link to Comment Orly
Orly's picture

From Wikipedia:

"Special drawing rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged. As they can only be exchanged for euros, Japanese yen, pounds sterling, or US dollars."

Well, everything can be exchanged for everything else but most stuff is priced in US Dollars, so it makes no difference.

:D

Thu, 01/31/2013 - 11:02 | Link to Comment JeffB
JeffB's picture

That's true, though I think it actually does make a difference... or more accurately that it can make a difference, and a big one at that.

A few countries here and there are making the first baby steps to trade without using the official reserve currency. It's tinkering on the edge and rather fringe at the moment, but they're breaking a bit of a taboo and laying a bit of the groundwork, infrastructure and mental attitude that they MUST use the U.S. dollar for all transactions.

It will make it easier for them to abandon the dollar, or perhaps less painful might be a more appropriate way of phrasing it, if and when it become even more painful to continue using it.

If they're already thinking and talking about it, have taken a few steps towards alternatives, and multiple countries have already begun to utilize some of those alternatives, albeit on a rather small scale relative to global transactions as a whole, I imagine it would speed up a transition should a perceived need arise.

JMO.

Wed, 01/30/2013 - 16:17 | Link to Comment kaiserhoff
kaiserhoff's picture

Good point.  Diversification makes plenty of sense.  But without corruption, how could their be any "WEALTHY CHINESE"?

Wed, 01/30/2013 - 17:26 | Link to Comment rwe2late
rwe2late's picture

Hong Kong?

Wed, 01/30/2013 - 15:35 | Link to Comment z tranche
z tranche's picture

To my understanding, the Chinese investments in US real estate have been more commerically focused - they're becoming landlords, not just luxury home buyers.  Also, of all places, Toledo has made the news on this front a few times?!

In Canada, the housing bubble in Vancouver is at least partially attributable to the Chinese.  And Toronto has been an investment haven for wealthy Iranians.  Interesting moves considering that Canada makes the US look tax friendly.  I may have to re-evalute that if Depardieu suddenly relocates to Montreal.

Wed, 01/30/2013 - 15:34 | Link to Comment kaiserhoff
kaiserhoff's picture

Well done, Bruce. 

South Africa is not quite like the others, since it was highly productive, but stabbed in the back by the UN One World crowd.  Still, much the same result.

Wouldn't the same thing be happening here, if the average Joe had more choices???

Wed, 01/30/2013 - 17:52 | Link to Comment Stuntgirl
Stuntgirl's picture

I was about to say, I'm witnessing the same phenomenon, capital flight, purchasing of assets and real estate abroad, and those who can't invest in export stocks or companies getting a lot o their income abroad. Destinations are northern europe, england and america, believe it or not, and chile.

Where do americans go when things get ugly?

Wed, 01/30/2013 - 19:14 | Link to Comment Orly
Orly's picture

La Costa del Sol.

:D

Thu, 01/31/2013 - 06:39 | Link to Comment Stuntgirl
Stuntgirl's picture

Haha, like Germans. Why would they destroy their holiday resort nd retiree parking lot?

No, I meant for wealth preservation and investment opportunities. Costa del sol really doesn't cut it.

Thu, 01/31/2013 - 00:00 | Link to Comment willwork4food
willwork4food's picture

Disneyland!

Oh, wait..

Wed, 01/30/2013 - 15:20 | Link to Comment bobbydelgreco
bobbydelgreco's picture

i hate to tell you zhers the world is..... & that means despite ben one day the dollar takes off

Wed, 01/30/2013 - 21:21 | Link to Comment Orly
Orly's picture

Sorry.  I forgot my decoder ring in the truck.

What are you talking about?

Wed, 01/30/2013 - 15:15 | Link to Comment azzhatter
azzhatter's picture

People are always slow to learn-" My stocks are going up fast" and "Have you seen the cost of a loaf of bread" or "Boy real estate is getting expensive" are not mutually exclusive

Wed, 01/30/2013 - 15:09 | Link to Comment disabledvet
disabledvet's picture

There is a point even though all of us disagree on everything that the "We" discover that they agree on pretty much everything. (Wasn't that a title of an Ayn Rand book? "We the Living"?) on think we're fast approaching that here in the USA. Clearly since the economics profession "yet again caused a recession they failed to predict" one must assume the next GDP print will be DECIDEDLY negative. Sure it might not happen...but a CHARACTER based approach to how the human race really behaves utterly guarantees it in my view. I've put my money where my mouth is...AGAIN...and I look forward to "winning" (if you call creating a double dip recession winning...I do not) AGAIN.

Wed, 01/30/2013 - 15:00 | Link to Comment GNWT
GNWT's picture

party like it's 1999...

 

at...

 

http://www.zirpinusa.com/

Wed, 01/30/2013 - 18:55 | Link to Comment ceilidh_trail
ceilidh_trail's picture

Spam much?

Wed, 01/30/2013 - 14:51 | Link to Comment Widowmaker
Widowmaker's picture

Wait, someone besides the bearded bastard is in the market??

Who knew.

Too bad he still can't print confidence in fraud.

Widowmaker has been a trader for over 3 decades and counting. There is nothing but vomit in anything that isn't nailed down (tangible).  Although he would deny it in person, PM's are the only play in town, something not thought possible until the last three years... 

Time to puke some more so Bruce can call it a "market."

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