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In A Typhoon, Even Pigs Can Fly (For A While)

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Here's the global financial crisis in a nutshell: access to easy credit can solve a temporary liquidity problem, but it can't increase the value of collateral or generate income.


The Chinese culture has a wonderful vocabulary of colorful analogies and metaphors, and today's title refers to the typhoon of liquidity (freely available credit) that has flooded the global economy for the past five years.

The source of the phrase is Liu Chuanzhi, the Chairman of Lenovo and the iconic figure of Chinese manufacturing. When asked a few years ago why 60% of Lenovo Group’s profit came from asset investment and only 40% came from manufacturing. He said “when the typhoons come, even a pig can fly in the sky. Everybody is profiteering from this. Why can’t we?”

The typhoon in this case is China's credit/liquidity-driven real estate speculative frenzy, in which the only losers are those who don't borrow to the hilt in the shadow banking system and buy, buy, buy empty flats in vacant buildings.

The critical distinction to make about typhoons of credit-driven speculation (in China, Japan, the U.S., Europe, etc.) is between liquidity and valuation.

Let's take a household as an example to explain the difference. Say the household owns a $300,000 house with a $150,000 mortgage. The household has home equity of $150,000.

Let's say one of the household loses their job and the sole remaining income is not enough to pay the monthly bills. This is a liquidity crisis. The household could borrow money based on the collateral of the home equity to tide them over until the second worker finds a new job.

A valuation crisis is different: let's say the household decides to sell the house and discovers the market value is only $150,000--the same as the mortgage. After deducting the real estate transaction costs, the household has negative equity. So instead, the owners claim the house is worth $250,000 and try to get a home equity line of credit to solve their income/liquidity crisis.

Here's the global financial crisis in a nutshell: access to easy credit can solve a temporary liquidity problem, but it can't increase the value of collateral or generate income. The owner can misrepresent the value of the asset to borrow money based on phantom collateral, but that doesn't change the market value of the underlying asset or increase the income needed to make loan payments.

Simply put, credit/liquidity cannot solve valuation/collateral crises. Correspondent J.B. recently addressed this issue:

"RE: accounting and real life. Sometimes they differ but over the long run they always synch up. For instance let's say a bank has a lot of quality assets but a liquidity issue. It will take that good paper to the Fed to get liquidity for the bank to get through the hard time (no write down required and it works out). On the other hand if the bank has a bunch of bad assets, it now has a solvency issue and not a liquidity issue (i.e. not marking to market does not agree with reality). Sure if CRE goes bad it can postpone marking it to market for a while but soon it has no cashflow and accounting does not matter because it cannot pay its bills, payroll or redeem demand deposits. The failure to properly mark assets to market will not save it and ultimately accounting and reality will re-synch."

The world's central banks and governments have tried for the past five years to fix a valuation/collateral/income crisis with liquidity. No wonder they've failed--enabling insolvent owners to borrow more money doesn't make the borrowers any less insolvent.

Once the liquidity typhoon dies down, the insolvent pigs will plummet back to earth. That's what we're seeing in the periphery economies and shadow banking systems around the world.

 

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Thu, 01/30/2014 - 13:45 | 4384493 maskone909
maskone909's picture

The markets are so much more fun when people are flying out of windows.  i equally enjoy watching the MSM squirm in attempt to explain the panic to the lemmings. 

Thu, 01/30/2014 - 14:05 | 4384503 Harlequin001
Harlequin001's picture

'Here's the global financial crisis in a nutshell: access to easy credit can solve a temporary liquidity problem, but it can't increase the value of collateral or generate income.'

It doesn't need to. Easy credit means that whoever prints the money can buy everything, at any price even if it means a loss because they can always make up their losses by creating more money.

The problem is that there is no currency anywhere now that's backed by gold, so there is no means by which to measure or to stop this.

There are no amount of losses that can't be resolved by banks printing more free money. They can fund competition that shouldn't exist until your business folds and buy it up for a song with even more free money and then have no incentive whatsoever to make good on it. Unlike you or I they don't even need to sell an investment to raise the funds to buy another. They don't need to take off the short to go long, they can simply borrow more money and have any losses made good by the banks and governments that take their shit in exchange for more free money because if anyone fucking stops them, we're all toast.

It's only a matter of time now until banks and hedge funds they invest in own everything, because losses don't need to be recognised if you have endless access to more money. There is now no way anyone can compete, they're already buying up houses by the thousand with more free money.

Who cares about collateral or income, the game is over until gold is back in money and there is nothing that bitcoin or any other coin can do to prevent it.

unless of course, you just buy gold. But where are you going to spend it if the guy who buys it can simply print more free money with which to buy it? You're still going to end up poor.

Thu, 01/30/2014 - 14:11 | 4384558 LawsofPhysics
LawsofPhysics's picture

It ends like it always has.  When those paper promises are simply no longer accepted by the energy and resource (commodity) providers.  Nothing changes until then.  History is very clear on this.

Hedge accordingly.

Thu, 01/30/2014 - 14:38 | 4384656 kenezen
kenezen's picture

I'm impressed with this entire explanation and conversation! This is gold. What does happen to the constructs? Do they go first? TruPs, synthetic CDO's, Swaps etc. or does the currency. From your explanation currency would be last? Is there a legitimate hedge offset? 

Thu, 01/30/2014 - 14:43 | 4384690 Carl Popper
Carl Popper's picture

To answer your question:

Gold, bitchez

(5 to 10 percent portfolio allocation as insurance or hedge)

Thu, 01/30/2014 - 15:24 | 4384912 negative rates
negative rates's picture

Yea, it's called the graveyard blues.

Thu, 01/30/2014 - 14:22 | 4384609 Tall Tom
Tall Tom's picture

If they overdo this, printing up currency to legally steal everything, then there will be a tipping point where everyone ends up not only poor but destitute and hungry...really hungry.

 

That is when the masses become mobilized and find the bankers that are doing this to them and they will kill them, their families, and even their children and grandchildren..

 

Few of the nobility in Czarist Russia survived.

 

Revolutions only happen when the masses are hungry, when there is FAMINE.

 

You are correct. That is what is happening. Furthermore with the drought in California the United States will realize the first taste of FAMINE since the 1930s.

 

You are correct. But what follows is even worse.

 

That day is approaching sooner than you may think.

Thu, 01/30/2014 - 14:56 | 4384779 Carl Popper
Carl Popper's picture

A Pol Pot solution eh?

 

Too bad it couldn't be limited to bankers and politicians and the top 100 wealth holders.   

 

These kinds of parties always go too long and get too wild however.  

Thu, 01/30/2014 - 14:31 | 4384639 kenezen
kenezen's picture

Great explanation!

Thu, 01/30/2014 - 13:47 | 4384499 V in PA
V in PA's picture

OT...

In the 1970's everyone said a black man will become President "when pigs fly". One hundred and fifty seven days into Obama's Presidency we have swine flu.

 

Thank you Thank you. Remember to tip your waitress.

Thu, 01/30/2014 - 14:41 | 4384673 oddjob
oddjob's picture

Obama is not Black, but he plays one on TV.

Thu, 01/30/2014 - 19:21 | 4385861 0b1knob
0b1knob's picture

Obama is not a homosexual.  Or pothead.  Or hack Chicago politician.   Or the puppet of Wall Street.

He just plays one on TeeVee.

Thu, 01/30/2014 - 13:46 | 4384500 duo
duo's picture

11 million vacant houses deteriorating with mold, rodents, copper theft, etc., yet still on the banks' books at full value.  What could go wrong?

Thu, 01/30/2014 - 13:56 | 4384525 Mr Pink
Mr Pink's picture

The real question I have is, Who can stay solvent longer them or me?

Please don't answer that

Thu, 01/30/2014 - 14:03 | 4384551 Harlequin001
Harlequin001's picture

er, th....

Thu, 01/30/2014 - 14:04 | 4384554 Miffed Microbio...
Miffed Microbiologist's picture

2 words to fix this: Debt Jubilee. Yeah, that will happen when when pigs fly.

Miffed;-)

Thu, 01/30/2014 - 14:12 | 4384576 maskone909
maskone909's picture

ive listened to discussions with steve keen regarding debt jubilee.  im not sure how it could be done considering derivitives would tank and cause even more insolvency.  they would essentially have to wipe out derivitives too. 

Thu, 01/30/2014 - 14:32 | 4384645 Miffed Microbio...
Miffed Microbiologist's picture

I agree. What I've been told the destructiveness of this will send reverberations throughout the world resulting in a complete Global Depression. Obviously no one wants this. However,if this occurred and if there were a threat of another jubilee in the future when imbalances were forming once again, I think this would be a needed check and balance where there is none today. Perhaps this is sophistry. I highly doubt a debt jubilee is in our future.

Miffed;-)

Thu, 01/30/2014 - 15:06 | 4384830 Carl Popper
Carl Popper's picture

You can't just wipe out debt.  Otherwise you benefit that scoundrel class of over leveraged debt holders. 

 

You must balance it with a wealth tax. 

Thu, 01/30/2014 - 15:24 | 4384918 negative rates
negative rates's picture

That's works, your wealth tax goes to balance their over leveraged debt holders.

Thu, 01/30/2014 - 14:51 | 4384738 oddjob
oddjob's picture

The debt jubliee has been TARP, ZIRP and QE's. I am guessing you did not get yours.

Thu, 01/30/2014 - 14:08 | 4384567 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

If pigs could fly, pork bellies would be thru the roof !

Thu, 01/30/2014 - 13:51 | 4384509 Pig Circus
Pig Circus's picture

Of course they can fly, I launch then each and everyday.

Thu, 01/30/2014 - 13:55 | 4384519 buzzsaw99
buzzsaw99's picture

again charles misses the big picture. :sigh:

http://www.youtube.com/watch?v=dzm8kTIj_0M

Thu, 01/30/2014 - 13:55 | 4384521 Silver Garbage Man
Silver Garbage Man's picture

They are all Insolvent pigs.

Thu, 01/30/2014 - 13:58 | 4384531 Kirk2NCC1701
Kirk2NCC1701's picture

In a Typhoon, planes will fly upside down. 

If OftWominds fly plane upside down, will have crackup.

If have crack up, will be sorry. 

Don't be sorry.  Stay grounded with Precious.

Thu, 01/30/2014 - 13:59 | 4384539 buzzsaw99
buzzsaw99's picture

wi tu lo

Thu, 01/30/2014 - 15:08 | 4384839 Frank N. Beans
Frank N. Beans's picture

bin dare, dun dat

 

Thu, 01/30/2014 - 13:58 | 4384535 highly debtful
highly debtful's picture

Ok, so we're applying a liquidity solution to a solvency problem and we're doing this pretty much on a global scale. Right. I may be an economic d-----s, but I've discovered that cold, hard fact in 2008.   

But I do like the quote. Catchy title too.

Thu, 01/30/2014 - 15:10 | 4384849 Carl Popper
Carl Popper's picture

It works for solvency issues if you can inflate the price of the asset up to the loan amount. 

Thu, 01/30/2014 - 15:25 | 4384925 negative rates
negative rates's picture

You ever heard of the word "corruption"?

Thu, 01/30/2014 - 14:00 | 4384542 Bunga Bunga
Bunga Bunga's picture

Don't worry, Obama will introduce the Myphoon.

Thu, 01/30/2014 - 14:07 | 4384549 Xandrino
Xandrino's picture

not entirely true...when the tyfoon dies down, we bomb some ME country which has oil and gas. Problem solved! And we rebuild again...voila!

Or they create an "event" like any of the so called "terrorist attacks" we've seen.

Or, we send some extra C-130's loaded with a couple of billions worth of cocaine.

MO is always the same.

Thu, 01/30/2014 - 14:07 | 4384563 Disenchanted
Disenchanted's picture

Pigs on the wing

 

If you didn't care what happened to me,
And I didn't care for you
We would zig zag our way through the boredom and pain
Occasionally glancing up through the rain
Wondering which of the buggers to blame
And watching for pigs on the wing.

 

You know that I care what happens to you
And I know that you care for me too
So I don't feel alone
Of the weight of the stone
Now that I've found somewhere safe
To bury my bone
And any fool knows a dog needs a home
A shelter from pigs on the wing

 

 

Thu, 01/30/2014 - 14:16 | 4384598 Kirk2NCC1701
Kirk2NCC1701's picture

Have a cigar.  By the way, which one's Pink?

Thu, 01/30/2014 - 14:30 | 4384641 moonman
moonman's picture

One of these days, I'm going to cut you into little pieces

Thu, 01/30/2014 - 14:31 | 4384644 Tall Tom
Tall Tom's picture

Sheep

https://www.youtube.com/watch?v=tcRYdVlGXNQ

The Lord is my shepherd, I shall not want
He makes me down to lie
Through pastures green He leadeth me the silent waters by
With bright knives He releaseth my soul
He maketh me to hang on hooks in high places
He converteth me to lamb cutlets

For lo, He hath great power, and great hunger
When cometh the day we lowly ones
Through quiet reflection, and great dedication
Master the art of karate
Lo, we shall RISE UP
And then we'll make the bugger's eyes water

 

Thu, 01/30/2014 - 14:09 | 4384566 fijisailor
fijisailor's picture

Hugo Salinas proposes silver money in Mexico.

 

http://www.silverdoctors.com/billionaire-hugo-salinas-price-gold-is-the-...

Thu, 01/30/2014 - 14:13 | 4384579 halfawake
halfawake's picture

when will they initiate a myra-like pomo for ordinary joe's like me? i have a 3-yr old samsung tv i value at 10,000usd give or take that i'd love the fed to take off my hands.

Thu, 01/30/2014 - 14:39 | 4384663 Carl Popper
Carl Popper's picture

Succinct and clear

Should be required reading for all politicians, krugman's, and statist utopian dreamers.

Thu, 01/30/2014 - 15:28 | 4384936 negative rates
negative rates's picture

Is there a reasonable interpretation for "statist utopian dreamers"?

Thu, 01/30/2014 - 14:42 | 4384675 kenezen
kenezen's picture

Fantastic article!

Thu, 01/30/2014 - 15:02 | 4384715 Hongcha
Hongcha's picture

Tall Tom reminds me of a more heavy-handed crashisoptimistic.  TT, you are on the money but the famine will be due to ignorance, in fact many are already in it but because they are fat we mistake it for gluttony.

I have always been drawn dystopian sci-fi, since I was little; and did not understand until much later that I liked it because that's what's coming.  Reformation at this stage is impossible, the disease has metastisized beyond treatment.  Fortunately we differ from a doomed cancer patient in that on our scale we can escape the body (The Body Politick in the sense Thomas Hobbes meant it) and be free; but it will take a lot of work and only a few can do it.

Gentlemen, there are only a few breathing holes and they are trying to gas the few that remain; but let me give you a big hint - they are applying their leeches electronically, digitally; so to the extent you can just get off the fucking wire you can get more done and cease to exist incrementally if you get my meaning.

Read (and I have endorsed this book a dozen times on various boards) A Canticle for Liebovitz.  Nuclear war is unleashed and the enraged population follows-up by destroying all technology whatsoever and pounds themselves back to the stone age.  Everyone loses.  The book shows how engrained human genius slowly restores everything, can't help but restore everything, including its own civilization ... and with it the technological skill sets that destroyed the previous civilization ... the author went insane, btw.

P.S. New lows on the way for gold and silver, sorry guys.

Thu, 01/30/2014 - 15:00 | 4384731 kevinearick
kevinearick's picture

you are much better off not responding than proving yourself a fool, but do what you want...

Equal Pay 4 Equal Stupid

It’s the President, brought to you by Netflix, and a growing array of mobile apps, all designed to roll out the latest and greatest spy network, in an incredibly shrinking empire…the morons have embedded empire assumptions in the chip design, automating the outcome upon which they are completely and utterly dependent, extortion. Welcome to the global banana republic, where everyone has an equal right to be a moron, with equal pay for equal stupidity.

It’s like cowboys and Indians. One day you are supposed to want to be a cowboy and the next an Indian. A woman cannot do what a man can do. A man cannot do what a woman can do. The only possible way you can have equal pay for equal work is if everyone is doing stupid. And if you measure value in terms of empire property, income and jobs, the only possible outcome is slavery, competing to see how many other slaves you can control.

Property, money and jobs are all side-shows, derivatives of control. The majority is incapable of initiating action because it has subjected itself to bipolar control anxiety, fearing everything and wanting to learn nothing, left to fight its own shadow, History. Look anywhere you want. The critters are trying to group up as the solution, like life is a popularity contest, assuming that the majority rules the minority. The majority rules itself; that’s it.

The morons want the biggest, the most, the whatever, precisely because they don’t have the DNA. The majority has no future, so it busies itself with busy work. Decisions have consequences; paper insurance is a self-destructive illusion. Chasing material possessions, derivatives, results in their scarcity, and demographic collapse, big surprise.

If you accept the empire’s assumption, and so by disregard choice in the path of your DNA, you get what you get, empire stupidity. It’s an NPV function. Don’t measure value in terms of empire derivatives and expect anything other than an empire outcome, failure. The kids aren’t chasing the empire so the majority is applying increasing control, with the expected results, demographic collapse within the empire, which is always a demographic ponzi.

You have to pay people with what they value to grow an economy net. Assuming a zero sum game with middleman knowledge advantage is the surest path to failure. Value is the demand, not artificial scarcity.

Politicians are paid to sell out their own. Goldman Sachs is a political organization, as are all corporations, confirmed by the Supreme Court, promising equal pay and delivering income inequality, monkeys chasing each other in a circle, first one way and then the other, wondering why they keep getting further behind on a path of diminishing return, printing more and more money.

Yes, if you work effectively, others will herd up to steal your product, but they will lose their ability to breed effectively in the process. Life is a marathon, not a sprint. Enjoy your day, but don’t get caught in the wrong forest pissing on the wrong tree. Money is the path to the past, which is why money goes to money. If you are demanding equal pay, you are a moron.

So, Obama went to Hawaii and played golf, selling out the majority of blacks with a shared sh-show. The error was grouping on race and demanding equality under that condition, becoming an easy target for stupid. Obama obviously does not define his public self. Like everyone else in the empire, he has power only to the extent he does what he is told, whether he chooses to ‘think’ so or not, and he is increasingly being told what to do by stupid f-ing computers caught in a positive feedback loop.

Of course the empire majority is going to hunt you to ground. Give it an echo to chase, move forward, and you become invisible relative to stupid, leaving it busy with busy work, seeking equality with law, self-destruction. Don’t base your self worth on what you see in the mirror. What you see there is the past. Make your own path.

Hillary and Obama were hired to play a woman and a black, for tv consumption.

 

Thu, 01/30/2014 - 15:03 | 4384813 starman
starman's picture

Banks became bad mortgage libraries after 2008!

Thu, 01/30/2014 - 15:07 | 4384835 Obama_4_Dictator
Obama_4_Dictator's picture

FADE THE RALLY!!

Thu, 01/30/2014 - 15:19 | 4384897 toros
toros's picture

@Harlequin001 +10

The bank always wins in Monopoly

Thu, 01/30/2014 - 18:55 | 4385805 smacker
smacker's picture

"...access to easy credit can solve a temporary liquidity problem, but it can't increase the value of collateral"

Not exactly true when it comes to home loans, as in the author's example.

Access to plentiful easy credit for home loans DOES increase property valuations. It's been doing so in the UK for decades due to an artificially created demand which pushes up prices. These higher valuations then give way to people taking out top-up mortgages or completely remortgaging to extract some of the capital for consumer spending on new cars, foreign holidays, new furniture etc etc.

Hey presto!! A virtuous economy aka Gordon Brown's endogenous growth theory.

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